Annual Budget Model Essay

1608 words - 6 pages

Introduction

Budgeting is a process in which every firm has to be involved with not only the board of director (Principle) who authorize the budget but also management team (Agent) who use it as well. In other words, budgeting need communication with every level of employee in the company in order to construct the goal or strategy of the company. Moreover, budgets are an instrument of power as well as being a reflection of power (Ashton et. al., 1995, p.289). Budgets that are not based on well-understood activities and costs are poor indicators of performance (Drury, 2005). Nowadays, at the time of information and technology the conventional budgeting is not good enough for withstand the rivalry in the global market. As Hope and Fraser, 2000 cited from Young, 2006 say the traditional performance management model cannot reflect today’s discontinuous change economy, which is why they point that annual budget model may be seen as having a number of intrinsic weaknesses and acting as a barrier to the effective implementation of alternative models for utilize in the success of strategic change. Therefore, I separate my essay into two parts. First, indicate and criticize on five inbred weaknesses of annual budget model. Second, explain ways in which the conventional budgeting process may be seen as an obstacle to accomplishment of the aims of Benchmarking, Balanced scorecard, and Activity-based models for the fulfillment of strategic change.

Discuss on inherent weakness of annual budget model

There are many weaknesses of traditional budgeting model and it has been the matter of considerable caviling. From recently research by Libby and Linsay, 2010 cited from Hansen et. al., 2003 encapsulated several discussions of budgets and assumptions regarding the use of budgets obtained from the academic research and practitioner literatures. The issues are following:

1. Budgeting depletes a lot of managerial time, which makes it an overpriced
process and may not worth the cost.

2. Budgets restrain firms from adapting to changes in a timely way due to
their unyielding nature.

3. The budgeting model is disconnected with strategy thereby putting it out of state with the competitive demands facing firms.

4. The use of the budget as a fixed performance contract leads to unreliable performance evaluation and promotes budget gaming.

5. Conventional budgets provide little relevant information for managing the costs of support activities (Drury, 2005).

In this following section, it is the extent to which such criticisms are shared by respondents in North-American sample of firms using budgets for control purposes (Libby and Lindsay, 2010).

Discussion 1: traditional budgets consume too much time to prepare

Libby and Lindsay, 2010 asked respondents to indicate how many weeks the annual formalized budgeting process takes to complete in their business unit (FIRM WEEKS). Survey respondents were also asked...

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