ACCT20001 Lecture Notes - Lecture 10: Denim, Root Mean Square
16 May 2018
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Budgeting and Standard Costing Systems
Budget cycle:
Criticisms of the annual budget
•Preparing budgets is time-consuming and may not be worth the cost
•The lack of flexibility inherent in budgeting does not fit well with a constantly changing
environment
•Budgets can be manipulated and provide incentives for the wrong/self-interested behaviour of
managers
•Budgetary reporting is not meaningful to front-line managers
•Budgeting eliminates the drive for constant improvement
•The budget may not be aligned with strategy
-However, recent research suggests the criticism may be over-generalised.
-Not all are applicable to all firms.
Tools to improve the effectiveness of annual budget
•Increased participation across all levels of management
•A strong culture of managing for the longer-term
•Operational budgets linked to longer-term strategic plans
•Flexible budgets
•Multiple revisions of the budget
•A culture of information sharing
•A strong decentralised management structure
•Use of rolling forecasts (always have 12-month budget)
•Awareness of the behavioural impact of budget targets
•Use the budget more interactively
•Improve process through participation, collaboration and communication
Illustration: Grand Jean Company
•Company that makes denim jeans in both their own plants and through external contractors
•Marketing staff - role is to estimate each plant’s quota
•Yearly budgets, updated at the end of each month in light of actual circumstances !
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