Budgetary Control Summary Reading the artical at first, write 2 pages (double side) summary about this article, use your words to write it and don’t need t

Budgetary Control Summary Reading the artical at first, write 2 pages (double side) summary about this article, use your words to write it and don’t need to use outside sources. Thanks. 13 Trends in budgetary control
and responsibility accounting
David Otley
13.1 Introduction
Budgetary control and responsibility accounting have been the foundation of management
control systems design and use in most business (and other) organizations for many years.
But whereas in the 1960s and 1970s such systems were almost exclusively based on
management accounting information, more recently we have seen a recognition that a
wider set of tools are required involving both the use of a range of non-financial perform-
ance measures and alternative concepts of accountability such as value chain management.
Nevertheless, the focus remains on accountability arrangements within and outside organ-
izations, and on taking a broad, holistic approach to the management of organizational
performance.
This chapter begins by reviewing the roles that budgetary control systems take in helping
managers assure organizational performance and by considering some of the growing body
of criticisms of their efficacy that have been made in recent years. Two distinct views have
been taken about the best way to proceed in future. The first espouses incremental improve-
ment to budgetary control processes, both in terms of linking them more closely to
operational requirements and planning systems, and also coping with the issues of rapid
change by more frequent budget revision and the adoption of techniques such as rolling
budgets. The second is more radical and suggests the abandonment of budgetary control,
replacing it with a variety of alternative techniques that will enable organizations to become
more agile and adaptive. Interestingly, both these approaches suggest that greater reliance
needs to be placed on non-financial measures of performance and that techniques such as
the balanced scorecard (BSC) can assist in this respect.
The chapter will conclude with an outline of the main issues facing control systems
designers, and attempt to indicate some ways forward for both practitioners and researchers.
However, it needs to be clearly recognized that the issues involved are not just those of the
technical design of planning and control systems but also those of embedding such systems
in the wider framework of organizational activities and functions. In short, budgetary
Control and responsibility accounting are not just techniques that can be applied to
organizations, but rather an essential part of the underlying fabric of organizational func-
tioning.
292 OTLEY
13.2 The roles of budgetary control
Budgetary control systems play a variety of roles in organizational activity. Many lists of the
functions of budgets have been suggested over the years, but the following are some of the
major purposes that have been suggested (Emmanuel et al. 1990):
A means of authorizing actions
• A focus for forecasting and planning
• A channel of communication and coordination
• A means of motivating organizational participants
• A vehicle for performance evaluation and control
However, these functions are potentially in conflict and it appears that no single system can
serve all of them equally effectively. A major and fundamental conflict arises between the
widespread use of such systems for performance evaluation (both of managerial perform-
(ance and of the performance of organizational units) and the need for accurate forecasting
to support organizational planning. This is not so much a conflict of basic functions, but
more a trade-off that needs to be made between short-term performance and longer-term
action. Wildavsky (1975) pithily described planning as ‘future control, whereby we antici-
pate future circumstances and take current action to improve our likely future state.
Attempting to use a budget system to give effective short-term control whilst encouraging
managers to make accurate estimates of future outcomes has long been recognized as a
knife-edge that managers need to walk.
A recent summary of the major issues and problems engendered by budgetary control
systems has been provided by Neely et al. (2001). Drawn primarily from the practitioner
literature, they maintained that the twelve most cited weaknesses of budgetary control are
• Budgets are time-consuming and costly to put together;
Budgets constrain responsiveness and are often a barrier to change;
Budgets are rarely strategically focused and often contradictory;
• Budgets add little value, especially given the time required to prepare them;
• Budgets concentrate on cost reduction and not value creation;
• Budgets strengthen vertical command and control;
• Budgets do not reflect the emerging network structures that organizations are adopting
Budgets encourage ‘gaming and perverse behaviours;
• Budgets are developed and updated too infrequently, usually annually;
• Budgets are based on unsupported assumptions and guesswork;
st
• Budgets reinforce departmental barriers rather than encourage knowledge sharing
• Budgets make people feel undervalued.
5G
.
Given such an extensive and all-encompassing list, one is led to wonder why budgea
continue to be so widely used! Nevertheless, it is clear that many managers and budgeta
control system operators are finding the traditional mechanisms of budgetary contra
BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING 293
increasingly unwieldy and ineffective at serving their central purpose of helping guide
organizational activities in appropriate ways.
13.3 Two responses to budgetary control problems
Two very distinct approaches have emerged from these problems. Intriguingly, both these
approaches have been espoused by a single practitioner-based organization that has made a
series of extensive studies of these issues, namely Consortium for Advanced Manufactur-
ing–International (CAM-1). The US-based activity-based budgeting (ABB) group of CAM-
I has taken the approach of examining how the budget system can be improved by marrying
an activity-based operational model with a detailed financial model. The European-based
CAM-I beyond budgeting (BB) group has taken a more radical approach, which first involves
changing (or eliminating) the traditional budgetary process and replacing it with more
adaptive procedures generally based on non-financial performance measures. Beyond this,
it then advocates radical decentralization and the empowerment of lower-level managers and
employees (see Hansen et al. 2003 for a more detailed review). Although both the ABB and BB
are both practice-led developments supported by prominent organizations, they do not
represent the totality of new budgetary practice developments. Nevertheless, the two distinct
positions provide a valuable codification of the dilemma that the budgetary control process
has found itself in, and Sections 13.3.1 and 13.3.2 describe more fully the two approaches.
13.3.1 IMPROVING BUDGETARY PROCESSES
The ABB approach concentrates primarily on improving budgetary planning. It focuses on
generating a budget from an activity-based model of the organization as opposed to the
traditional responsibility centre focus. The ABB group contends that the planning role of
budgeting has suffered because traditional budgetary processes are too high-level and too
aggregate; more detailed capacity management and process-based approaches can be used to
ground it more effectively in organizational reality. The ABB approach first establishes a
plan that is operationally feasible before attempting to generate a financial budget. Although
this may seem to be exactly the budgetary approach recommended by accounting textbooks,
in practice budgets are often constructed incrementally from budgets of the previous period,
with operational detail being added later. If a feasible financial plan is not produced at the
first iteration, the ABB approach allows the organization to adjust five possible elements to
achieve the budget target: (a) activity and resource consumption rates; (b) resource capacity;
(C) resource cost; (d) product or service demand quantity; and (e) product or service price.
Because the traditional budget process does not collect information on activity and resource
consumption rates, it offers fewer possibilities to adjust the budget.
294 OTLEY
The ABB group lists several potential benefits of their approach (Hansen and Torok
2003):
1. The detailed operational model used avoids unnecessary financial calculations being
made for operationally unfeasible plans.
2. The more sophisticated operational model provides a richer set of tools for balancing
capacity.
3. Lower-level managers and employees can more easily understand information expressed
in operational rather than financial terms.
4. Activity-based approaches reinforce a horizontal, process-based view of the organization,
in contrast to traditional budgeting’s vertical orientation.
In many ways, the ABB approach can be seen as correcting one of the two deficiencies
introduced by taking a purely management control (Anthony 1965) view of budgeting.
Anthony separated management control from both strategic planning and operational
control and, as a result, management control came to be seen as primarily driven by financial
information. More recently, improvements to budgeting can be seen as restoring the
connections between these other two important processes. From the strategic point of
view, approaches such as the BSC (Kaplan and Norton 1992) have been concerned to restore
the link between performance management and strategy. Most obviously in their book The
Strategy-Focused Organization, Kaplan and Norton (2001) maintain that the process of
strategic mapping is a necessary step in the construction of effective measures of perform-
ance within a BSC. Other authors, such as Simons (1995) in his ‘levers of control frame-
work, have combined a focus on strategy with a wider view of the control mechanisms that
can be used to implement strategy. In the contingency theory literature also, strategy has
been identified as a key contingent variable for control systems design. Considerably less
work in management control has focused on the second interface in Anthony’s categoriza-
tion, namely that with operational control. There may be several reasons for this, such as the
concentration of researchers on top-level controls, the prevalence of many different control
practices at lower levels, and the unfamiliarity of accounting researchers with the types of
non-accounting controls (including production line layout and physical inventory controls)
that have gained increased importance at first-line management levels. The ABB approach
can be seen as a major contribution in this arena.
13.3.2 RADICALLY CHANGING BUDGETARY PROCESSES
The European-based BB group has taken a more radical approach in arguing that traditional
budgetary control is fundamentally flawed in such a way that incremental improvement will
not be effective in eliminating the major problems from which it suffers (see Hope and
Fraser 2003 for a more detailed exposition of their work). The BB approach seeks to avoi.
what they label the annual performance trap. This is their shorthand for the set of
BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING 295
dysfunctional behaviours that commonly stem from evaluating managers’ performance
against budgetary targets that are set without reference to credible external benchmarks
and that remain fixed for the next budget year. There is no doubt that the literature on
budgeting is replete with examples of dysfunctional behaviour driven by undue emphasis on
meeting (possibly inappropriate) budgetary targets. These range from manipulating budget-
ary estimates before the year begins, through the manipulation of reported numbers during
the budget year (often by exploiting timing differences) to the adoption of inappropriate
management decisions (such as the postponement of maintenance expenditure); all have the
objective of producing numbers that look good against budget targets whilst simultaneously
destroying value. To avoid these problems, the BB group recommends replacing rigid annual
budget-based performance evaluations with performance evaluations based on relative per-
formance contracts reviewed with hindsight.
The first stage of the BB approach is thus to adopt more adaptive management processes
freed from the rigid annual routine of budgetary control. Drawing on experience with
participant firms, six principles of managing with adaptive processes were set out as follows:
• Base goals on medium-term benchmarks;
• Base evaluation and rewards on relative performance contracts with hindsight,
Make resources available as required;
• Make action planning a continuous and inclusive process;
• Coordinate cross-company actions according to prevailing customer demand;
Base performance measures on continuous reviews against medium-term goals.
The first principle is designed to remove the emphasis on preset and fixed (budget) targets,
and to replace them with benchmarked performance standards. Thus, a common form of
performance target would be a league table, either internally (e.g. different branches in the
same company) or externally (e.g. performance in comparison with leading competitors)
referenced. The first principle forms the basis implementing the second, and arguably the
most important, principle. Here the objective is to remove reliance on an arbitrary per-
formance target that is set for a fixed period (typically a year) many months in advance. It is
to be replaced by a relative performance target that is continually updated in light of
changing conditions. More radically, performance against such targets will be evaluated
with hindsight, that is, fixed targets are not set at the beginning of the period, but may well be
adjusted to reflect the actual operating experience and economic circumstances during the
period. Rewards may be connected to performance, but typically by relying more on
subjective performance evaluations with an emphasis on workgroup rather than individual
rewards. The aim appears to be to attempt to engender a philosophy of doing what is best for
the firm in light of current circumstances, and to encourage teamwork.
The third principle is that resources are not fully budgeted for in advance, but held in a
central pool so that they can be applied at short notice to those areas that have the greatest
current need for them. The other three principles are not unique to this framework, but
reinforce the others. The BB group’s hope is that these six principles will make forecasting
more accurate and more useful again.

Purchase answer to see full
attachment