![]() This is a particular problem when departments are not allowed to substitute services provided from within the company for lower-cost services that are available elsewhere. The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation methods used. ![]() If a department does not achieve its budgeted results, the department manager may blame any other departments that provide services to it for not having adequately supported his department. Further, anyone who uses gaming is essentially being encouraged to engage in unethical behavior, which can lead to further difficulties related to fraud. This can be a serious problem, and requires considerable oversight to spot and eliminate. Gaming the SystemĪn experienced manager may attempt to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing expense estimates, so that he can easily achieve favorable variances against the budget. ![]() The work required can be more extensive if business conditions are constantly changing, which calls for repeated iterations of the budget model. The time involved is lower if there is a well-designed budgeting procedure in place, employees are accustomed to the process, and the company uses budgeting software. It can be very time-consuming to create a budget, especially in a poorly-organized environment where many iterations of the budget may be required. Thus, if there is a fundamental shift in the market just after a budget has been completed, there is no system in place to formally review the situation and make changes, thereby placing a company at a disadvantage to its more nimble competitors. For the rest of the year, there is no procedural commitment to revisit strategy. The budgeting process only focuses the attention of the management team on strategy during the budget formulation period near the end of the fiscal year. Other conditions that can also cause results to vary suddenly from budgeted expectations include changes in interest rates, currency exchange rates, and commodity prices. ![]() Unless management acts quickly to override the budget, managers will continue to spend under their original budgetary authorizations, thereby rupturing any possibility of earning a profit. This condition is a particular problem when there is a sudden economic downturn, since the budget authorizes a certain level of spending that is no longer supportable under a suddenly reduced revenue level. If the business environment changes to any significant degree, the company’s revenues or cost structure may change so radically that actual results will rapidly depart from the expectations delineated in the budget. ![]() Unrealistic ResultsĪ budget is based on a set of assumptions that are generally not too far distant from the operating conditions under which it was formulated. In more detail, the problems with budgeting include the items noted below. There are a number of serious problems associated with budgeting, which include gamesmanship, excessive time required to create budgets and budgeting inaccuracy. ![]()
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