07_OverheadsForChen1 - Objectivesfortoday Operational...

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ACCY 302 (Chen) Fall 2009, Class 07 1 Objectives for today Operational budgets What are the different roles of budgets? How do the roles conflict? Responsibility centers What are they, why use them, how do budgets come into play? Identify types of responsibility centers and common performance measures used for each Issues to consider when designing incentive and control systems for each type A closer look at some performance measures for investment centers
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ACCY 302 (Chen) Fall 2009, Class 07 2 Types of budgets capital budgets long-term plans (up to ten years) for acquiring fixed assets financial budgets budgets of cash flow, balance sheets (usually for upcoming year) operational budgets projected income statements and related nonfinancial measures for the next operating cycle (which is usually a year)
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ACCY 302 (Chen) Fall 2009, Class 07 3 Major roles of operational budgets Planning: details of what management hopes to accomplish and how, plus a means to communicate those goals should reflect current economic conditions, limitations of resources Motivation: commits individuals to a plan of action direction of action (i.e., take these actions as opposed to others) + strength of commitment (comes from tie to pay, promotion) Evaluation: standard of comparison of actual performance
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ACCY 302 (Chen) Fall 2009, Class 07 4 Conflicts between major roles major conflict minor conflict major conflict From ""Conflicting roles in budgeting for operations", p. 140 Planning Motivation Evaluation
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ACCY 302 (Chen) Fall 2009, Class 07 5 Conflicts between major roles  (continued) Planning vs. motivation planning - need a realistic assessment of firm's capabilities and most likely outcomes motivation - targets should be embraced by managers, and should be difficult but attainable (i.e., not all managers should hit them) conflicts that arise: "realistic, most likely" ≠ "difficult but attainable" if managers participate in setting targets, a chance of "budget slack"
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ACCY 302 (Chen) Fall 2009, Class 07 6
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ACCY 302 (Chen) Fall 2009, Class 07 7 Conflicts between major roles   (continued) Motivation vs. Evaluation motivation - difficult but attainable targets evaluation - may be desirable to remove effects of things beyond the manager's control conflict that arises (both can reduce motivation): once targets are set, don't want to change them all the time but also don't want to penalize manager for "uncontrollables"
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ACCY 302 (Chen) Fall 2009, Class 07 8 Controllability Principle Business performance = f (agents' actions, uncontrollable events) e.g., good or bad luck; unexpected changes in input costs or economic conditions; shocks like labor strikes, weather But it’s often hard for principals to disentangle how much of that performance is due to an agent's actions vs. how much is due to uncontrollable events So s hould agents not be held accountable for business performance?
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07_OverheadsForChen1 - Objectivesfortoday Operational...

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