Free Taking Into Account The Above-Mentioned, The Following Deficiencies Of Jack Riley’s Budgeting Policy Were. Case Study Example

Management Accounting Case Studies

Management Accounting Case Studies
1. Case 9-43

Executive summary

Jack Riley, as a budget controller in the division of social services for the state, practices the participative budgetary approach within the division. Jack Riley’s budgetary policy prescribes for department managers to prepare preliminary department budgets in compliance with set spending constraints that are further reviewed and, as a general rule, reduced by the division’s senior management. Afterwards, the department managers are responsible for fulfilling the reviewed budgets and are to account for any excessive expenditure incurred by their departments.
After analyzing Jack Riley’s budgetary approach, the following deficiencies have been identified that require immediate actions to be taken. One of the major problems relates to formal participation of the department managers in the budgeting process regardless of the declared participative budgeting policy.
As a result, there is a risk that department managers are not positively motivated to fulfill the budgets reviewed by their senior management and perceive the whole budgetary process as unfair. This may lead to overstatement of expenditures at the stage of submitting the preliminary department budgets to the senior management.

Analysis

It seems that Jack Riley does not entirely differentiate several budgetary approaches that may be implemented within an organization or institution. Our analysis shows that Jack Riley’s approach resembles more the top-down budgetary process. In the meantime, the participative budgetary process is different, as it has specific operational and behavioral features that are further described and that may benefit the organization or institution that uses the participative approach.

Part 1 of the Case Study

Operational and behavioral benefits of the participative budgetary process. Thus, the participative budgetary process provides an opportunity for an organization or institution to effectively manage “various factors like production capacity, sales possibilities, and procurement of material, labor” in order to develop an effective and at the same time realistic budget (Managerial-accounting.blogspot.com, n.d.).
Furthermore, the organization may improve “quality of forecasts to use as the basis for the budget” (Managerial-accounting.blogspot.com, n.d.), as employees take an active part in the budgeting process and provide the management with updated information on their department activities.
At the same time, the participative budgetary process envisages a chance to review preliminary budgets if they do not fit with each other. As a general rule, if such a situation occurs, the submitted budgets “are sent back down to the originators for another iteration, usually with guidelines noting what senior management is looking for” (Bragg, 2010), so that the originators’ budgeted figures will fit within the corporate strategy.
It is fair to mention that the use of the participative budget approach “improves information flow between superiors and subordinates” (as qtd. in Tanase, 2013) in the way that the senior management may receive update on current issues relating to the department activities. Simultaneously, the subordinates may promptly receive feedback from their management with regard to their performance results and suggestions on the department budgeted figures.
As a result, the employees perceive the finally approved budgets that are to be fulfilled as self-determined and are normally more willing to cooperate in achieving the budget (Principlesofaccounting.com, n.d.). Thus, if the department is not on the budget, the employees are more likely to recognize their input that resulted in such a situation and are more motivated to fix the problem.
In addition, a cost controlling process within the organization or institution may be more effective upon introduction of the participative budgeting approach (Managerial-accounting.blogspot.com, n.d.), as the employees will control better the execution of the budget they assigned for and, therefore, less input from the cost controlling function of the organization will be needed.

Part 2 of the Case Study
Deficiency 1. Formal participation of department managers in the budgeting process.
Brief description of the issue. It seems that the department managers are only taking a formal part in the budgeting process that is perceived as participative by Jack Riley. In fact, the department managers just submit their department budgets to the senior management for approval. Such budgets are required to be drafted in accordance with specific limits prescribed by the division’s budgeting policy, including strict spending constrains.
At this point, the department managers stop taking an active part in the budgeting process. At the end, they receive proportionally adjusted budgets decreased to make reserves for the anticipated budget cuts and special funding needs.
Thus, a share of the department’s appropriation target is reserved by the senior management and may be used only at its discretion.
Recommendation. It is advisable for Jack Riley to engage the department managers more in the budgeting process as it is actually called a participative process. This means that the role of the department managers in the budgetary process should not end at the time of submitting their preliminary budgets to the controlling department.
For instance, Jack Riley may introduce some kind of a budget committee within the division, whose members will be all department heads. Thus, they will have an opportunity to communicate with each other and adjust their preliminary budgets when there is feedback from the division’s senior management. In this way, the finally approved budgets that are to be executed by the department heads will be in line with their expectations.
Deficiency 2. Risk of budgeting distorted figures.
Brief description of the issue. As there is practice in the division relating to cutting requested expenditures, the budgeting process may be exposed to the risk of overstatement of future expenditures by the department heads at the time of submitting the preliminary department budgets.
Such actions might be fully justified in the department heads’ view as by overstating the request for next year expenditures and considering the possible cuts due to the anticipated budget cuts and special funding needs, the department heads might receive the necessary amount of funds at the end.
Recommendation. Jack Riley may consider providing the department heads with general guidelines followed by the senior management in determining the goal and percentage of withheld funding.
In this way, the participative budgetary process will become more transparent and the above-mentioned risk of departments requesting more funds than needed may be minimized.
Deficiency 3. Unfair budgeting of the department expenditures.
Brief description of the issue. From the department head’s perspective, it might be unfair to force him/her to include the total amount of all government projects directed by higher authority in the preliminary department budget without increasing the appropriation target.
Moreover, budgeting all fixed expenditures without any possible adjustment might put the budget execution at risk if there are some unexpected events in relation to the existing contracts (including a counterparty going bankrupt or simply withdrawing from the signed contract which may result in the division looking for a new supplier that may charge extra fees). Given that the department heads are to account for excessive expenditures, not including any possible adjustments may seem unfair to them.
Recommendation. It is very important for the division’s senior management and controlling department to clearly communicate the amount of the appropriation target for each department and explain why its amount differs between departments that have more government projects and the ones that do not have such projects.
It is also recommendable for Jack Riley to explain that reserves, made at the final stage of the budgetary process that led to certain budget reductions, are to be used if unexpected events take place and, therefore, some department will need more funding to overcome negative consequences of such events.
Deficiency 4. Absence of positive motivation for department managers to fulfill budgets.
Brief description of the issue. Despite Jack Riley’s belief that the introduced participative budgetary approach in its current state creates grounds for the department heads to be positively motivated to increase the efficiency and effectiveness of their departments, in reality, the department heads might be more discouraged than motivated.
Jack Riley’s budgetary policy only declares participation of every department in the budgeting process. To the contrary, the departments provide the controlling department with their requests, which are afterwards adjusted by the senior management at its discretion without any further discussion with the departments.
Moreover, if the department incurs excessive expenditures, their heads are required to account for such expenditures. Nevertheless, there is no motivation for the department heads that fulfill the budget and do not have any excessive expenditure.
Recommendation. It is advisable for Jack Riley to involve the department heads more in the budgeting process. In this way, they will feel meaningfulness of their suggestions and actions, as well as will have better communication with the senior management.
Jack Riley may also consider introducing some benefits for department heads that are on the budget. Thus, for instance, the following motivation may be implemented, according to which decrease of a department’s appropriation aimed at creating the division’s reserves next year is to be smaller for those departments that are on the budget in the current year.
Alternative courses of action. Thus, the above identified and described deficiencies of Jack Riley’s budgeting policy may be addressed by several alternative courses of action.
Firstly, Jack Riley may consider involving the department managers more in the budgeting process. In this way, the current scheme of work will become more of participative nature. This course of action will also help the department managers to understand better their role in the budgeting process.
Secondly, certain steps should be taken to bring more transparency and less autocracy into the budgeting process. As of now, the department managers do not actually follow the senior management’s way of thinking when the senior management cuts the preliminary budgets prepared by the department managers.
Thirdly, Jack Riley may take some actions aimed at creating more motivation inside the division for being on the budget. At present, there is only negative motivation for the department managers to fulfill their budgets to avoid accounting for additional expenditures before the senior management. To improve the existing situation, Jack Riley may implement the motivation system granting some decrease of a department’s appropriation aimed at creating the division’s reserves next year for those departments that are on the budget in the current year in comparison with the other departments.

Conclusion

Recommendations (decision)
Upon finalizing the analysis of the division’s budgeting process, it is recommendable for Jack Riley to engage the department managers more actively in the budgeting process. Moreover, it seems that creation of a budget committee will be very reasonable, as it will allow the department managers and senior management to communicate more on budgetary issues.
It is also advisable to introduce more transparency in the budget cutting process, as well as to introduce positive motivation for department managers that are usually on the budget and do not have excessive expenditures. Indeed, the senior management may further discuss and decide on incentives to be introduced to motive its subordinates for fulfilling the budget.
2. Case 9-45

Please find below performed calculations needed to build Photo Artistry Company’s master budget for 20x5.

Sales budget

Cash receipts budget

Production budget

Direct-material budget

Cash disbursements budget

Summary cash budget

Budgeted schedule of cost of goods manufactured
Note. This table was built in accordance with the template provided by Houghton Mifflin Harcourt (n.d.).

Budgeted schedule of cost of goods sold

Note. This table was built in accordance with the template provided by Principlesofaccounting.com (n.d.).

Budgeted income statement

Note. This table was built in accordance with the template provided by AccountingCoach, LLC (n.d.).

Budgeted statement of retained earnings

Note. This table was built in accordance with the template provided by Accountingtools.com (n.d.).
Budgeted balance sheet as of December 31, 20x5

References

AccountingCoach, LLC. (N.d.). Multiple-step income statement. Retrieved from http://www.accountingcoach.com/income-statement/explanation/4
Accountingtools.com. (N.d.). Statement of retained earnings. Retrieved from http://www.accountingtools.com/statement-of-retained-earnings
Bragg, S. (2010, December 6). What is participative budgeting? Retrieved from http://www.accountingtools.com/questions-and-answers/what-is-participative-budgeting.html
Houghton Mifflin Harcourt. (N.d.). The cost of goods manufactured schedule. Retrieved from http://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/managerial-and-cost-accounting-concepts/the-cost-of-goods-manufactured-schedule
Managerial-accounting.blogspot.com. (N.d.). Participative budgeting and its advantages. Retrieved from http://managerial-accounting.blogspot.com/2012/11/participative-budgeting-and-its.html
Principlesofaccounting.com. (N.d.). Chapter five: Special issues for merchants. Retrieved from http://www.principlesofaccounting.com/chapter5/chapter5.html
Principlesofaccounting.com. (N.d.). Chapter twenty-one: Budgeting: Planning for success. Retrieved from http://www.principlesofaccounting.com/chapter21/chapter21.html
Tanase, G. L. (2013, August 13). An overall analysis of participatory budgeting. Advantages and essential factors for an effective implementation in economic entities. Journal of Eastern Europe Research in Business and Economics, 2013 (2013), Article ID 201920. doi:10.5171/2013.201920