Table of Contents
The Role of Budgets in Decentralized Companies ..................................................... 2
The Budget as a Planning and Control Tool ........................................................................ 2
Understanding Budgets: Planning and Coordination .......................................................... 2
Definition of a Budget .............................................................................................. 3
Budget Gaming and Dysfunctional Behaviors ........................................................... 4
- Example: The O.ice Clip............................................................................................................4
1. Deferring Necessary Expenditures: ............................................................................... 5
2. Accelerating Sales Near Year-End: ................................................................................ 5
3. Taking a Big Bath: ......................................................................................................... 5
4. Adding Budgetary Slack: ............................................................................................... 5
The Budgeting Process ............................................................................................ 5
The Two Main Functions of Budgets .......................................................................... 6
1. Planning and Coordination ........................................................................................... 6
2. Control Through Target Setting ...................................................................................... 7
Budget Targets: Planning vs. Motivation .................................................................... 7
Dysfunctional EJects of Budget Targets ............................................................................ 7
Problems with Traditional Budgeting ........................................................................ 7
Alternative Budgeting Tools: Rolling Forecasts & Benchmarking ................................ 8
1. Rolling Forecasts (for Planning) ..................................................................................... 8
- Example ...................................................................................................................................9
2. Benchmarking (for Performance Measurement) ............................................................10
Concluding Remarks .............................................................................................. 10
, Budgeting and Performance Measurement
The Role of Budgets in Decentralized Companies
In the bioimage case we discussed in class, we learned about a decentralized company with
managers that are quite autonomous and whose performance is mainly based on return on
invested capital. They are primarily investment centers.
The managers are quite entrepreneurial in the way they seek to maximize their own
responsibility center's profits. Sometimes they make decisions that may not be in the company's
best interest. However, no matter how much they sell internally or externally or how much
infighting there is, they are all connected to one another—and to the company as a whole—
through the budget.
The Budget as a Planning and Control Tool
The budget is used to plan, incorporating budgeted revenues and costs that provide direction and
help coordinate different responsibility centers. It is also used to control, measuring performance
by holding responsibility center managers accountable to budgetary revenues and costs.
Budgetary figures become targets, sometimes linked with incentives such as bonuses, which can
have unintended consequences.
Understanding Budgets: Planning and Coordination
At the top, we have the organization’s vision and mission statement, which serve as the
foundation for the strategic plan.
• Next, we have the five-year operating plan, which includes programs and projects that
enable the organization to execute the strategic plan.
• These programs require financing, which is where the annual operating plan and
budget come into play.
• At year-end, resources are allocated to project activities for the upcoming year, ensuring
that the projects align with strategy and are financed on a yearly basis.
• The organization evaluates manager progress against these plans and budgets.
This system is cybernetic, meaning it regulates itself through a feedback loop where managerial
achievements serve as inputs for further actions such as replanning.
The Role of Budgets in Decentralized Companies ..................................................... 2
The Budget as a Planning and Control Tool ........................................................................ 2
Understanding Budgets: Planning and Coordination .......................................................... 2
Definition of a Budget .............................................................................................. 3
Budget Gaming and Dysfunctional Behaviors ........................................................... 4
- Example: The O.ice Clip............................................................................................................4
1. Deferring Necessary Expenditures: ............................................................................... 5
2. Accelerating Sales Near Year-End: ................................................................................ 5
3. Taking a Big Bath: ......................................................................................................... 5
4. Adding Budgetary Slack: ............................................................................................... 5
The Budgeting Process ............................................................................................ 5
The Two Main Functions of Budgets .......................................................................... 6
1. Planning and Coordination ........................................................................................... 6
2. Control Through Target Setting ...................................................................................... 7
Budget Targets: Planning vs. Motivation .................................................................... 7
Dysfunctional EJects of Budget Targets ............................................................................ 7
Problems with Traditional Budgeting ........................................................................ 7
Alternative Budgeting Tools: Rolling Forecasts & Benchmarking ................................ 8
1. Rolling Forecasts (for Planning) ..................................................................................... 8
- Example ...................................................................................................................................9
2. Benchmarking (for Performance Measurement) ............................................................10
Concluding Remarks .............................................................................................. 10
, Budgeting and Performance Measurement
The Role of Budgets in Decentralized Companies
In the bioimage case we discussed in class, we learned about a decentralized company with
managers that are quite autonomous and whose performance is mainly based on return on
invested capital. They are primarily investment centers.
The managers are quite entrepreneurial in the way they seek to maximize their own
responsibility center's profits. Sometimes they make decisions that may not be in the company's
best interest. However, no matter how much they sell internally or externally or how much
infighting there is, they are all connected to one another—and to the company as a whole—
through the budget.
The Budget as a Planning and Control Tool
The budget is used to plan, incorporating budgeted revenues and costs that provide direction and
help coordinate different responsibility centers. It is also used to control, measuring performance
by holding responsibility center managers accountable to budgetary revenues and costs.
Budgetary figures become targets, sometimes linked with incentives such as bonuses, which can
have unintended consequences.
Understanding Budgets: Planning and Coordination
At the top, we have the organization’s vision and mission statement, which serve as the
foundation for the strategic plan.
• Next, we have the five-year operating plan, which includes programs and projects that
enable the organization to execute the strategic plan.
• These programs require financing, which is where the annual operating plan and
budget come into play.
• At year-end, resources are allocated to project activities for the upcoming year, ensuring
that the projects align with strategy and are financed on a yearly basis.
• The organization evaluates manager progress against these plans and budgets.
This system is cybernetic, meaning it regulates itself through a feedback loop where managerial
achievements serve as inputs for further actions such as replanning.
