ACC602: STRATEGIC MANAGEMENT ACCOUNTING

SEMESTER 1, 2020
Individual Assignment         10%

Name : Prashant Kumar

ID : 2019000229
Essay Plan
Introduction (1st Paragraph)
 What is budget - is a management instrument used by any entity, financially ensuring
the dimension of the objectives, revenues, expenses, and results at the management
centers level and finally evaluating the economic efficiency through comparing the
results with those budget for.
 This essay will elaborate on the all problems and behavioral issues that may arise in the
budget setting process for the Pacific Manufacturers Company PMC Ltd, the main
concern areas, highlighting the budget types and the relevant budgetary controls that may
be required in the Pacific Manufacturers Company PMC Ltd and lastly, by
recommending how those problems or issues identified in (1) above can be minimized.

Body (2nd Paragraph)

Identify all problems and behavioral issues that may arise in the budget setting process for the
PMC Ltd.
 Budgetary slack
 Senior managers imposing on lower level management for e g: transfer pricing
without consideration
 Poor communication in PMC Ltd as it follows a top down management system
where the views of employees are not considered
 Dysfunctional behavioural issues can arise

Body (3rd Paragraph)

Discuss the main concern areas, highlighting the budget types and the relevant budgetary
controls that may be required in the PMC Ltd.
 Types of budget Zero budget
 Operational budget
 Master budget
 And budgetary controls needed by PMC Ltd

Body (4th Paragraph)

Recommend how those problems or issues identified in (1) above can be minimized
 State the solutions to solving the behavioural issues in Part 1

Conclusion
Budget is an essential and important tool use for controlling and planning, which almost every
organization adopts. This allows them to develop and implement strategic plans, either long-term
or short-term.
INTRODUCTION
The budget is a management instrument used by any entity, financially ensuring the dimension
of the objectives, revenues, expenses, and results at the management centers level and finally
evaluating the economic efficiency through comparing the results with those budget for. A major
component of the managerial control, the effectiveness of the budgeting process is reflected in
the fact that requires the strategic planning and implementing the plans, offers a frame of
reference for performance evaluation, contributes to personnel motivation, encourages the
coordination and communication (Bar-Haim Aviad 2002). The Pacific Manufacturers Company
(PMC) Limited is a company which manufactures most of its products like consumer electrical
goods (fridges, freezers, washing machines, and similar white – goods products). This essay will
elaborate on the all problems and behavioral issues that may arise in the budget setting process
for the Pacific Manufacturers Company PMC Ltd, the main concern areas, highlighting the
budget types and the relevant budgetary controls that may be required in the Pacific
Manufacturers Company PMC Ltd and lastly, by recommending how those problems or issues
identified in (1) above can be minimized.
 BODY
 To begin with, the problems and behavioral issues that may arise in the budget setting process
for the PMC Ltd are Firstly, Budgetary slack which is the difference between the estimate
revenue or cost projection and a realistic of the revenue or cost. The managers introduce the
budgetary slack, also known as padding the budget, during the budget preparation process. They
will underestimate the revenues and overestimate the costs and expenses. In this way, they can
request for more allocation of resources from the organization. There is a tendency for the
managers to do in almost all organizations, across industries (Jr. Bierman Harold, 2010).
Secondly, Participative budgeting where it allows managers at all levels of the firm to develop
their own initial estimates for budgeted sales and costs. Budget is usually prepared either top
down or bottom up. Under the top down budget method, top management prepares the budget
and pass on the information to the employee as what they need to do in the budget. There is no
involvement and communication from other employee. When there is participation from the
employee, they become involved in the budgeting process. They form part of the budget. It
gives them a sense of commitments and they also foster a sense of belongings toward the
budget. When they feel committed, they will be motivated aiming for the targets. By
encouraging participation from the employee, it helps to increase motivation levels and reduce
resistance level to the budget as well as reduce possible conflict within organization. For
instance, Poor communication in PMC Ltd as it follows a top down management system where
the views of employees are not considered. Thirdly, Dysfunctional behavioural when the
budget’s goals are the same as managers’ goals, the actual performance will meet the expected
level of performance or even exceed the expectations. This is called goal congruence. It refers to
the alignment and consistency of individual’s goals (in this instance, it is the manager) with the
organizations’ goals. The managers will be motivated to aim for the goals of the organization,
as this will also lead them towards their individual goals. In the case of goal incongruence, the
managers are not motivated at all. They may put in minimum efforts (in worse case scenario, no
efforts from the managers) towards the budget, thus affecting the actual performance (Bonner E.
Sarah. 2008).

Moreover, the main concern areas, highlighting the budget types and the relevant budgetary
controls that may be required in the PMC Ltd are Firstly, Zero based budget is a process where
all activities in the organization are initially set to zero and managers must justify each activity in
terms of its continued useful to the business to receive an allocation of resources. Secondly,
Operational budget is the annual budget of an activity stated in terms of budget classification
code, functional/subfunctional categories and cost accounts. It contains estimates of the total
value of resources required for the performance of the operation including reimbursable work or
services for others. It also includes estimates of workload in terms of total work units identified
by cost accounts. Thirdly, Master budget (or annual budget) is a comprehensive set of budgets
that covers all aspects of a firm’s activities. It consists of several interdependent budgets
Furthermore, how those problems or issues identified in (1) above can be minimized Firstly, the
occurrence of budgetary slacks within an organization can result in declining productivity and
performance because the employees work towards attaining goals that are within their capability.
Implementing this measure can help reduce budget slack where a budget should not be the basis
for evaluating performance where the budget as a tool is used to measure how well the
employees who are found to achieved their targets are rewarded with bonuses and payoffs,
whereas those who are unable to achieve the targets are reprimanded. However, this encourages
employees to create a budgetary slack that allows them easily achievable targets so that they can
be rewarded in every financial period. Removing any link between performance, bonuses, and
the budget can reduce the motivation to cheat the system and benefit from a performance-based
reward. Secondly, for Participative budgeting under the top down budget method, top
management prepares the budget and pass on the information to the employee as what they need
to do in the budget. There is no involvement and communication from other employee. When
there is participation from the employee, they become involved in the budgeting process. They
form part of the budget. It gives them a sense of commitments and they also foster a sense of
belongings toward the budget. When they feel committed, they will be motivated aiming for the
targets. By encouraging participation from the employee, it helps to increase motivation levels
and reduce resistance level to the budget as well as reduce possible conflict within organization.
Lastly, for Dysfunctional behavioural where management can create negative budgeting attitudes
in several ways. One of these is using budgets or giving the impression they are being used, to
squeeze every ounce of productivity out of employees, or solely to identify poor performers or as
a means of restricting an employee’s ability to perform if budget variances are always viewed as
“bad news” subordinates will quickly adjust their behaviour to avoid negative evaluations.
Necessary managerial actions may not be taken because of fear of penalties. Unless top
management is willing to recognise the need for flexibility, reality and positive change, lower
management support quickly dissipates. In order to create and promote a reasonable degree of
positive behaviour among the people in an organisation, a budgetary should possess the
following important features or elements such as frequent feedback on performance, flexible
budgeting capabilities, monetary and non-monetary incentives, participation and realistic
standards (Jr. Bierman Harold, 2010).
CONCLUSION
Budget is an essential and important tool use for controlling and planning, which almost every
organization adopts. This allows them to develop and implement strategic plans, either long-term
or short-term. Budget can be used to forecast organization’s performance for the next financial
year. This forecast is utilized by the organization during the strategic planning stage. When the
budget is developed, the information is communicated to the employees. It also acts as a
motivating tool for the employees, especially when they participate in the
budgeting process. The employees’ actual performance is evaluated against the budget
performance. It affects their job appraisals, which have a direct link to any form of incentives,
which may be given to them when budget is achieved. This is the traditional budgeting, which
many organizations adopt. The organization uses traditional financial measures, which
only focuses on one perspective of performance. They measure the consequences of the
performance, and not finding out what causes the performance. The behavior aspects of
budgeting can be solved by some of the recommendations as mentioned: feedback on budget, use
of monetary and non-monetary incentives (Kennedy, Dugdale. 1999).
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