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ACC 602- Strategic

Management Accounting
Semester 1, 2020

Name: Shania Frances Narayan

Student i.d:2019000759
Essay Plan
Paragraph 1: Budget is a statement that sets out the spending taxable income and borrowing
plans of the company over the forthcoming financial year and achieves net profit or loss. This
essay will identify the behavioral issues in the budget setting process of Pacific Manufacturing
Company Ltd. Discuss the main concern areas, budgetary types and the budgetary controls that
may be needed by PMC Ltd. It will also recommend solutions to the behavioral issues identified.

Paragraph 2:Behavioral issues that may arise from the budget setting process in Pacific
Manufacturing Company Ltd is dysfunctional behavior, budgetary slack, interdepartmental or
divisional conflict since senior management is in authority thus can result in conflicts between
the senior management and the employees.

Paragraph 3: Furthermore, conflicts in resource allocation may occur as well as goal

congruence where the goals of the employees do not often match with that of the company.
Control by top management that is senior managers is quite evident in this case study as they
impose targets on lower departmental employees and do not seek consideration.

Paragraph 4: Moving on, budgets may be perceived by lower management employees as being
imposed and can also demotivate employees. Communication is also deeply lacking in this

Paragraph 5: Moreover the budgetary types include operational budgets, rolling budgets, zero
budgets, flexible budget, and fixed budget, activity based budget, master budget, incremental
budget and etc.

Paragraph 6: Budgetary control refers to setting strategies plans and goals of the organization
are strictly monitored to achieve the company’s objectives and improve performance. Budgetary
controls required by PMC Ltd are responsibility centres; decentralization into
subdepartments.zero based budgeting and for sales budget past trend results and plant capacity
must be considered. Firewalls and information security as well as audit trailing are the budgetary
controls that can be used.

Paragraph 7: Recommendations to behavioral issues mentioned are involving employees for

budget consultation during budget setting process. Participative and zero based budgeting can
resolve dysfunctional behavior while boosting employee morale because participative budgeting
follows a bottom up management system. Understanding behavior of employees through
engaging them in team based activities and praising them for their feedback.

Paragraph 8: To conclude, managers of all levels must be aware of how their actions impact the
employees of the company. It is important that these behavioral issues are minimized so that the
Pacific Manufacturing Company Ltd can achieve high turnover and performance through
aligning the goals of the company with that of the employees.

Budgets are an essential report that simply provides the direction of a company’s financial
standing. It highlights the result in either profit or loss that in turn reflects the quantification of
management’s objectives followed and implemented thoroughly. A manager of the company is
often faced with specific targets to aim and to achieve those goals, a manger must be committed
towards it.By utilizing the company’s financial data, a company can be able to forecast and plan
a budget for the Company’s future. Budget is simply defined as the statement that sets out the
spending plans and income of the company for the forthcoming financial period.Waren and fess
(1999) define budgeting as a “formal written statement of the management plans for the future
that is expressed in financial terms’’. Budget should align with the firms operational and
strategic plans and because the firm’s budget is controlled by all levels of the firm’s
management, the budget is usually an aggregate compilation of the departmental budgets. Budget
is also used by the company’s management for motivation and performance evaluation. This
essay will mainly discuss and identify all problems as well as behavioral issues that can arise in
the budget setting process for Pacific Manufacturing Company Ltd. Highlight and discuss the
main concern areas together with the budget types and relevant budgetary controls that may be
needed in Pacific Manufacturing Company Ltd. Thirdly, recommend the solutions to the
problems or behavioral issues identified. This essay is based on the case study of Pacific
Manufacturers Company Ltd. The company is engaged in manufacturing consumables such as
electrical goods like freezers, washing machines and etc.

To begin with, the problems and behavioral issues that may arise from the budget setting process
in Pacific Manufacturing Company Ltd is firstly, dysfunctional behavior. This occurs due to the
improper implementation of the budget meaning the budgets are prepared annually and involves
unrealistic management policies as well as expectations, the actions of mangers can be found to
be negative that will adversely affect the firm to achieve its organizational goals and this
behavior often results in conflicts with that of the goals set by the organization and employee
goals. Management of PMC Ltd builds negative budgeting attitudes in many ways either through
using the budget or giving the impression to the workers that they are being severely used for
productivity and increasing output. Secondly, budgetary slack that means padding the budget
and is done in an attempt to build an environment whereby targeted goals are met or it is
exceeded doing little advancement to the aims of the organization. When a budget slack is
introduced in the company, employees can fail to maximize company’s sales and also minimize
costs. For instance, when the budgeted sales are met, it often results in a reduction in incentives
to push or work further. Budget slack has primary reasons perceived that is people often think
that their performance would look better in superiors’ eyes that is they can beat the budget, It is
to cope up with uncertainties during unforeseen circumstances and cover the costs for example,
machine breakdown thus the targeted costs are often cut off in resource allocation process and is
likely to be padded. Interdepartmental or divisional conflict is yet another problem that may
arise in the budget setting process. In PMC Ltd the budgeting process is considered to be a
formal one but it becomes an informal process when the managers of various divisions compete
for the company’s scarce resources resulting in the dilution of original goals. Departmental
conflict or conflict between managers of different divisions occurs when different divisions
blame each other for the failure of not reaching its budgeted targets for instance; the lower
division accountant’s success to find variances in the budget highlights another worker’s failure
in reaching his budget goals.

Moreover, an operational budget based on what is possible has the most risk of literally setting
the targets low as to adversely impact motivation. To motivate well, a budget should set its
objectives greater than those which are set for planning and mainly present objectives that is
difficult but achievable. Difficult objectives will equate to a pessimistic budget, if it is set at a
possible but not at a credible level, there is risk of falling short of objectives and underusing
company’s resources. Budgets may conflict over resource allocation resulting in blaming
others when goals are not met. When allocating resources according to Lorange (1998) the key
strategic resource; therefore it’s essential for organization to effectively utilize the know-how of
their employees at the right places. As the company’s financial and capital budget are based on
figures contained in the operational budget, it should therefore reflect management’s best
estimates of revenues and expenses. When the budget will be good the firm may underuse its
resources and when it is bad then there would be insufficient resources in order to allow full
exploitation of opportunities in the market. It is literally the challenge of management to allocate
resources to its most effective use as well as coordinating and integrating activities of
participating employees and functions. As written in formulation and planning part of strategy
implementation it is important to choose the right people for the right responsibility. Goal
Congruence is another behavioral challenge to making a decentralized organization in
functioning correctly. Basic idea of goal congruence is to ensure that the goals of the
organization align with that of the employees. When goals become incongruent then the
employees will only work for their own personal goals (Pattie et al., 2013) .Lack of goal
congruence results into an increase in job satisfaction as this is quite evident in PMC Ltd.
Thirdly, control by management is evident in the case study however top management
must be involved in monitoring the direction and reviewing the process but in this scenario
it is not the case. PMC has a top down budgeting system which has more dictatorship ruling
from higher level managers whereby they impose budget targets on subordinate or lower division
managers. Another important aspect of control is that managers should attempt to let people be
outspoken and ask for their opinions regarding the changes to make that will positively impact
the budget and maximize firm’s profit.

Furthermore, Budgets may be perceived by the by lower level management and the workers
because it is imposed by the senior management thus affecting labor relations and might lead
to inaccurate record keeping. Pacific Manufacturing Company’s budget are demotivating as
they are imposed by senior managers rather than negotiating with low level division
managers for instance, transfer prices being set by senior management without consulting the
divisional managers. Thus, Communication is deeply lacking in the budgeting process of
Pacific Manufacturing Company therefore everyone in the organization must be aware of the
direction the company is going and what are the objectives, mission and visions. The
management’s role here is to make certain that this communication takes place amongst the
senior management and the middle management, between diverse functions and people, then
only will the company prosper. Beer et al. [2000] sees a foremost challenge in the absence of
honest rising conversations from employees about issues and underlying causes that are caused
by strict top management.

Moving on, the budget types are numerous and these include operational budgets which show
the detailed classification of a company’s expenses, expected costs and the income taking into
account the annual and the quarterly performance. Accountants usually complete the operational
budget before the accounting period begins to include revenues and the expected costs.
Operational budgets also include historical sales performance, current trends in the industry,
seasons, launching of new products, and competitions. An important essential element of sales
budget is forecasting whilst market research is also carried out. Firms sometimes create more
than one operational budget to achieve anticipated decline in the revenues or launch of a new
product to boost performance and profitability. An effective operational budget provides details
on the price and the future product volume to estimate total sales. Rolling budget (continuous
budget) which is continuously updated by adding a new time frame such as quarter, it acts as a
control and a guide that is a cash budget is a rolling budget however it takes a lot of time and
effort in preparing. Secondly, Zero budget is when all the activities in the organizations are
initially set to zero thus managers must justify each activity in regards to its usefulness to the
firm to achieve an allocation of resources, it prevents taking forward the past inefficiencies
unlike increment budget Thirdly, flexible budget consists of a detailed plan for controlling the
costs which is valid for ranges of activity therefore static budgets are prepared for a particular
planned level of activity and it is used to control overheads allowing the selection of the
appropriate benchmark for cost control enabling comparison to take place. Flexible budget can
be prepared for any budgeted costs or revenues. Fixed budget is to be used in situations when
the organizational environment is stable and can be predicted with given levels of certainty.
Fixed budgets are prepared in advance and it is not amended with the budgeting period process..
Annual or Master budget refers to the summary of all the budgets that consists of budgeted
income statement, statement of financial position and cash flow statement. Incremental budget
is where this year’s budget is prepared with reference to last year’s budgets actual results by
adjusting to inflation. Incremental budget is commonly prepared because it is quick to prepare
and involves easier processes with information readily available so anyone can prepare as limited
quantitative analysis is required. It also enables the organization’s to spend the amount allocated
to a maximum level resulting in budgetary slack because if they do not spend then they won’t
have much in next year’s budget allocation.

Consequently, Budgetary controls refers to when the first step is to basically set the budget and
when it is set, an authorized person has to distribute the prepared budget then budgetary control
is the next crucial process to manage a company’s finance. A budgetary control has its own set of
obstacles to overcome. It is where plans or the goals to achieve an organizations objective are
thoroughly monitored and also there are actions which are taken to improve performance.
According to Husey, k, (2004) budgeting control system is simply setting plans, laying down
policies for which the managers are held exclusively responsible. Budgetary control is vital in
Pacific Manufacturing Company as spending too much can have an unfavorable impact on the
company’s profit. Budgetary controls that is relevant and may be needed include; A
responsibility center which refers to any functional unit which is headed by the manager
responsible for the particular activities of that unit and performance.Responsibilty centre include
four main types that is firstly, Investment centre where the output of the company is matched
against assets being employed to produce them. Profit centre is when performance is measured
by the difference between outputs and inputs.Thirdly,Cost centre takes into account the units
being measured in monetary terms but output are mainly not.Lastly,Revenue centre includes
organizations units being calculated in monetary terms however it is not matched against
expenses.Responsibilty centre allows the managers of PMC ltd to monitor organizational
functions. Decentralization involves the restructuring of the company into smaller sub units for
instance, divisions and departments each of which is assigned specific operations and decision
making responsibilities. In PMC ltd subunits are assembly, finished goods, sales divisions and
others. Managers of subunits will have greater local information about operations and markets
that will allow them to manage their specific areas as well. Budget administration helps in
organizing the budget in which a budget committee plays an important role. Budget committee
will consists of managers from upper level that is top management for example, departmental
heads, executives and directors coordinating the preparation of budgets, policy matters
comparing actual results with the budgeted. Zero based budgeting is a type of budgetary control
which is substantially designed to revitalize budgeting. As PMC ltd should not only focus on
making decisions regarding new programmes but also review the existing programmes. Zero
based budgeting must be proved by the managers that the activities are justified in terms of its
continued usefulness and the volume of activity. For sales budget, past sales trend, capacity of
plant, estimates from the salesman, financial and potential markets and other factors that must be
taken into consideration.. Firewalls and Information security is also one of the budgetary
controls used where budget information becomes extremely sensitive and confidential. Firewall
which is a computer or a router will be placed between firm’s internal network and the internet to
monitor information based on both outside world and the firm’s local network. Audit trailing
involves tracing every financial transaction through changing its information and then back to

In addition, behavioral issues and problems can be reduced and recommendations to the
problems identified earlier incudes a holistic approach which is not domain based by involving
lower departmental managers and employees for due consideration and consultation of the
budget for the company that will eventually lead to evolving. This can simply resolve
dysfunctional behavior in PMC Ltd. A budgetary slack can be prevented by participatory
budgeting and zero based budgeting. Apart from the two, a good alignment between the
budgeting process and the organization’s strategy could be achieved by coordination and
communication between the senior management and the lower level departments. Participative
budgeting allows managers at all levels of the company to build their individual estimates for
budgeted sales and costs Participative budgeting can be expensive however it encourages
coordination and communication between managers and wider organization. A participative
budgeting is actually an bottom up approach involving people who are affected by the budget
and lower level employees thus the participation by the manger in the budget preparation process
acts as motivating employees, boosts morale and performance also reducing organizational
conflicts. Participative budgeting ensures the building of good relationships among employees,
performance appraisals and divisional meetings to review budget results. When individuals of
vast knowledge about local conditions are added, it adds value to the company by positively
impacting the entire budget setting process. Understanding the behavior of staffs and also clients
can make a difference in solving departmental conflicts that may arise in PMC Ltd through
recommending strategies to the senior management to focus on key areas such as skills and
motivating staffs.Interdivisional conflicts can be resolved through conducting regular feedback
meetings with all levels of department, considering the viewpoint of all the employees and also
having a conflict resolution team in the company. Senior managers should put in extra efforts to
become role model for the organization by demonstrating the right kind of behavior. Engaging
all departments regularly in encouraging them in team based activities such as sharing of
personal opinions or ideas and also praising employees for positive feedback. Thus, this is
literally a long term strategy whereby to be a role model is simply the key. Resource allocation
problems can also occur in PMC Ltd and it can be eliminated through finding the right personnel
to approve and render the responsibilities of allocating the resources in the company with due
consultation of divisional managers when setting transfer prices as this affects the assembly
division because they have to stop purchasing supplies from the third parties. This will impact
the resources allocation and production process. Goal congruence can be achieved through
setting achievable targets for the company which is realistic, rewarding the employees and lower
department managers by giving them bonuses or appraisals. Creating a happy work environment
so that employees remain focused and motivated towards their work then only will they be able
to invest in the coordination and success of the company. Budget consultation should be held by
the manufacturing company so that not only the top management can be in control but the
employees are given a chance to contribute to the budget setting process. This will show equality
and promote high turnover. A top down management system can have adverse effects in the
organization. Moreover, it can be solved through having a bottom up management system and
using multiple means of communication in the company. It is important to establish better
communication methods within the managers and employees in the firm. Aligning the
department’s strategic goals to the vision set for PMC Ltd. Promoting teamwork and
collaboration by setting up team based activities. Resolving poor communication can occur
through creating a secure environment for communication. As, PMC Ltd focuses on a top down
management system, it is vital that the company creates a secure environment for all the levels so
that employees feel comfortable in sharing criticisms present in the budget, voice out opinions
and also offer creative ideas.

To conclude, managers of all levels must be aware of how their action as well as the activities of
upper level coordinators will directly impact the sub departmental employees of the company. In
fact, budgeting should be looked as a means of giving managers a clear presentation of how the
organization works. It is vital for the senior managers in Pacific Manufacturing Company Ltd to
understand that when preparing budgets, it often do not turn out to be perfect as it is developed in
prediction and judgments will be made it therefore requires modification. Until and unless the
senior managers are willing to recognize when changes in the budget are needed through
outstanding consultation, the lower level managers and employees will become more
demotivated and this leads to dysfunctional behavior in the company. That is, lower
departmental managers and employees in PMC Ltd will not likely respect the prepared budget if
they feel that they are not being involved in consultation and communication by the senior
management.Behavioural issues mentioned earlier in PMC Ltd that may arise includes
dysfunctional behavior, budgetary slack ,interdepartmental conflicts, resource allocation
problems, goal congruence, control by the top management, imposition of budget by senior
management that can demotivate employees and also lack of communication in the company.
Budgetary types include operational budgets, flexible budgets, rolling budgets, zero budgets,
incremental budget, fixed budget to name a few. Budgetary controls simply means setting out
plans and implementing policies that for which the managers will be responsible.Relvant
budgetary controls that may be needed in Pacific Manufacturing Company Ltd is having a
responsibility centre which is a unit in an organization controlled by all the heads of the
department for the activities of a specific unit and its performance.Responsibilty centres has
subunits that consists of investment, profit, cost and revenue centres. Decentralization is another
budgetary control that is used for restricting the company into smaller sub units or divisions.
Zero based budgeting is a type of budgetary control that is simply designed to invigorate
budgeting. Production budget gives an estimation of the volume produced in days, months or
weeks. Firewalls and information security is also a budgetary tool to secure budgetary
information that is sensitive and confidential. Audit trailing refers to tracing financial
information that is related to the budget. Recommendations to solving behavioral issues and
problems include; having a participatory budget that favors a bottom up management system in a
company and zero based budgeting. Good alignment between senior managers and employees
through communication and coordination. Understanding the behavior of staffs and clients can
help make a difference in solving departmental conflicts. Engagement of all levels of department
and involving them in team based activities. Having budget consultations through considering
the views and opinions in making strategic changes to the budget.Resouce allocation problems
can be minimized by appointing the right personnel for the right responsibility with due
consultation of employees when setting transfer prices.

Approximately :( 3280 words)

Graphical illustrations

Top down budget process

President and ceo

Vice president and senior

managers Advantages: Advantages:
and  Focus on overall  Increased
employees growth of the motivation due to
company the ownership of
 Quick way of the budget
preparing a budget  Contains realistic
 Saves time and information since
resources of lower employees are
management familiar with the
 Less tedious department setting
approach the budget
 Better
Profit within the
 Senior managers
can concentrate on
Responsibility Disadvantages: Disadvantages:
Cost Revenue
centres  Managers may not  Senior managers
feel motivated as may resent loss of
they are not part of control
the budgeting  Bad decisions
process from
Investm  Senior managers inexperienced
ent may make managers
unrealistic budgets.  Result into
 May lead to under budgetary slack
or over resource and disputes.

Beer, M., Eisenstat, R. A., (2000). “The Silent Killers of Strategy Implementation and Learning”,
Sloan Management Review Summer 2000

Hussey,R.,(2000) Budget and Budgetary control as means of achieving organizational objectives

Lorange, P., (1998). “Strategy Implementation: the New Realities”, Long Range Planning, Vol.
31, No. 1, pp. 18 to 29.

Pattie, M. W., Bensonb, G., Casperb, W. and McMahanb, G. C. (2013) Goal congruence:
fitting international assignment into employee careers, The International Journal of Human
Resource Management, 2013 Vol. 24, No. 13, 2554–2570,

Warren,R.K.,Fess,P.,(1999).Budgeting profit,planning and control.Nigerian Accountant Journal

April,Vol 3,No 2,PP 28-36