But again how will these variable costs be monitored to avoid their increasing

But again how will these variable costs be monitored

This preview shows page 6 - 8 out of 9 pages.

But again, how will these "variable" costs be monitored to avoid their increasing in future years? Budgeting Describe (a) the benefits of top-down budgeting and (b) the benefits of bottom-up budgeting. Solution: a. Benefits of top-down budgeting include: • Better for decision control in the sense that the variance from the budget is useful for performance measurement and compensation • Lower influence costs and less gaming by the people being held accountable for the numbers • The budgeted numbers are not biased by lower-level managers who are being evaluated based on these numbers (less sandbagging) • Less time is spent generating these top-down numbers to the extent that lower-level managers spend no time on the process b. Benefits of bottom-up budgeting include: • More knowledge assembly of information held by lower level employees • Participative budgeting provides more employee buy-in and perhaps better acceptance and higher morale • Better for decision management
Image of page 6
Exercises Preparation for the Exam 13.03.2020 7 Describe how budgets and budgeting systems help solve the organization problem. Give examples. Solution: The organization problem consists of partitioning decision rights and measuring and rewarding performance. Budgets help solve the organization problem by providing a measure of performance, by linking knowledge and decision rights, and by transferring specialized knowledge within the firm. Agency problems exist in all multi-person organizations. Budgets are an important mechanism for controlling agency problems. Budgets provide a performance measure by comparing budgeted amounts to actual amounts. Within organizations it is useful to try to link decision rights and specific knowledge. Budgets give managers the decision rights to spend resources on specific functions up to the dollar limit in the budget. Budgets partition decision rights, and by giving budgets to managers with the specialized knowledge, decision rights and knowledge are linked. The budgeting process separates decision management from decision control via the initiation, ratification, implementation, and monitoring process. A manager does not have decision rights over all steps in the process. Through a bottom-up budgeting process, the manager's budgeting decision rights are controlled. Finally, budgeting does not solve all organization problems. There is the remaining problem of managers biasing their budget forecasts if these same numbers also are used for performance evaluations. Activity based costing (ABC) and Time-Driven activity based costing (TDABC) Decision Management vs. Decision Control of ABC Critically discuss the following quotation: "ABC (activity-based cost) information, by itself, does not invoke actions and decisions leading to improved profits and operating performance .... For ABC systems to be effective, everyone in the company—from top management to operating personnel—must view them as cost management tools rather than as accounting tools. To achieve this objective, the accounting or finance department must relinquish ownership of these systems to the users.
Image of page 7
Image of page 8

You've reached the end of your free preview.

Want to read all 9 pages?

  • Fall '18

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors