Management Accounting

Question

The budgeting process emerged in the 1920s as a tool for managing costs and cash flows in large industrial organizations such as DuPont, General Motors, and Siemens. It wasn’t until the 1960s that it mutated into a fixed performance contract. It was at this time, according to Tom Johnson, coauthor of Relevance Lost: The Rise and Fall of Management Accounting, that companies used accounting results not just to keep score but also to dictate the actions of people at all levels of the company. By the early 1970s, a new generation of leaders schooled in the finer arts of financial planning had begun to rely on financial targets and incentives—in lieu of such benchmarks as productivity and marketing effectiveness—to drive performance improvement.

Many Companies have invested huge sums in IT networks, process reengineering, and a range of management tools including EVA (Economic Value Added), balanced scorecards, and activity accounting. But they have been unable to establish a new order because the budget and the command and control culture that it supports remain predominant. Senior executives have been heard to proclaim that their people have all the authority of the chairman. In practice, they marshal the power of computer systems to uncover mind-numbing levels of detail and, using the budget as a benchmark, demand to know why a sales team has rung up higher-than-normal telephone charges, for instance, or why it has underspent the quarter’s entertainment allowance. And where is “all the authority of the chairman” when the team finds it can’t meet the budget’s sales targets? Fearing the consequences, the team will lean on customers to order goods they have every intention of returning. And if by some chance the team thinks it will exceed its targets, it will press customers to accept delivery in the next fiscal period, delaying valuable cash flows.

The setting of budgets may affect employees’ level of motivation and behaviour. In the case of Mitsubishi Motors Corp, the setting of aggressive internal targets by Mitsubishi Motors Corp may have put pressure on employees to overstate the fuel economy of its vehicles. As a result fuel economy testing methods did not comply with Japanese regulations for 25 years. Japan’s sixth-largest automaker as such has lost half its market value – some $3.9 billion – since it admitted last week to manipulating test data for four domestic mini-vehicle models, including two it produced for Nissan Motor Co .

Required:

1.0 Defined what the budgeting process is and explain the importance of the budgeting process to organizations.

1.1 Definition of the budgeting process

1.2 Importance of budgeting process

2.0 Explain how the setting of budgets may affect employees’ behavior.

2.1 Defined what the budgeting process is in management accounting and explain the importance of the budgeting process to organizations. (Please use relevant books/journals/professional websites to support your answer).

3.0. List of References

Please take note that this essay should be 2000 words in length (+/-10%) and be written in an academic style with full references using the APA referencing method for citation and list of reference.

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