INSTRUCTIONS: You MUST submit this document as your assignment. Other formats will not be accepted and you will receive a mark of zero. Do not try to change the layout of this document as it will not be accepted.
Complete all details in Section 1 and start your assignment on Page 2. Ensure you enter your details in the header on Page 2, they will appear on every page. Save the file as (e.g.
1123456BS1234). IMPORTANT: Save this file as a PDF, other formats WILL NOT BE ACCEPTED.

Cardiff Business School
COURSEWORK COVER SHEET 2014/2015
Section 1 (to be completed by the student)
Student Name:
Oliver Conroy
Student Number:

C1218229

Module Code:

BS3517

Module Title:

Management Accounting & Control

Coursework Title:

Budgeting Essay

Submission date: (before 4pm on…)

17.03.2015

Date document last saved/printed: Section 2 ( To be completed by the Lecturer)
COMMENTS:
---

09.03.2015
(Updated
automatically)

Lecturer:

Nina Sharma

MARK AWARDED:

Number of words:

1976

Created by: sbsjj15

Document last opened: 09/03/2015 14:22:03

Version 2.3

Oliver Conroy C1218229

Management Accounting & Control BS3517

i.) INTRODUCTION The apparent flaws and inaccuracies in the traditional budgeting process have caused many scholars to openly question the need and validity of this stalwart of modern day management accounting. Hope and Fraser (2003) spearheaded the ‘Beyond Budgeting’ approach, challenging the conventional format of budgets and arguing that they should be abolished, removing the rigid shackles imposed on businesses of traditional budgets in order to allow the company to prosper in changing market conditions. However some scholars, such as Libby and Lindsay (2010) argue that the steps underlined within the system still constitute a key role in the necessary control systems. A CIMA survey in 2009 highlighted that traditional budgets are still used by over 85% of European companies. Furthermore the arguments as to which approach is better stems from near enough every aspect of the firm. Rothberg (2011) highlights key differences in the management styles of both, performance measurements and more. Ultimately Hope and Fraser’s argument that traditional budgeting should be abolished completely is extremely unlikely as it is systematically embedded in modern business culture.

Figure 1: Graph Highlighting The Adoption of the Beyond Budgeting Movement (Source: CIMA)

ii.) CRITISCISMS AND BENEFITS OF TRADITIONAL BUDGETING The concept of budgeting has long

been the cause of disgruntlement for the majority of firms. Adams, Bourne and Neely (2003) came to the realisation that 80% of companies are dissatisfied with the budgeting process for numerous reasons including: expenses, time consumption, lack of strategic direction or out-­‐dated practices. These findings could have acted as a catalyst for radical action along the lines of Hope and Fraser’s desired process. In contrast with these findings, it needs to be noted that Libby and Lindsay (2010) found that most firms are simply taking steps to improve their budgeting systems instead of completely overriding a proven process.

Page 2 of 9

Oliver Conroy C1218229

Management Accounting & Control BS3517

The traditional form of budgeting corresponds to the Incremental Budget, which uses historical data (i.e. last years budget) and cost relationships to ultimately calculate the budget for the current year. The most simplistic view on budgets, relies on meeting the targets set out in the budget and the employees being provided with a suitable reward, however these targets and incentives need to be carefully monitored as they need to create hard but achievable goals in order to keep employee morale Figure 2: Mind-­‐map Detailing Reasons why People Have Problems With Budgets (Source: BBRT)

high. Setting too hard a target, or too low an incentive will ultimately

lower employee participation and hinder company performance, forming the basis of Argyris (1952, 1953) papers on the “Human Costs of Budgeting” which states that for budgets to be successfully implemented full participation from all employees is necessary.

Although the budgeting process does not add any value to the firm, Bartram (2006) found out that the most efficient company would spend 79 days preparing the budgets and the least efficient firm would take 210 days, which is a considerable amount of time producing something that does not provide a financial benefit. Drury (2008) and Goode and Malik (2011) argue that the shift into the ‘information age’ has created a business environment so complex that the traditional budgeting methods actually hinder innovation and development rather than aid it. Despite these critiques having sufficient empirical evidence to support their arguments, Ekholm and Wallin (2010) state that the traditional budgets still have a role to play in modern business however the way in which they are implemented needs to be rejuvenated.

Page 3 of 9

Oliver Conroy C1218229

Management Accounting & Control BS3517

Despite widespread criticisms of its key components, budgeting under the traditional method has remained extremely popular among the majority of businesses. A CIMA report (2004) suggests that up to 99% of firms have a budget in place and had no intention of removing it from their control systems. This could simply have been down to the excessive amount of work hours that would be required to overhaul a system considered to be at the foundation of management accounting (Becker et al, 2009) agreeing with Libby and Lindsay’s (2010) argument that it will be difficult to convince managers that the company would be better off without budgets. On the other hand, it could also be down to the belief that is used in the correct circumstances, with the appropriate tools budgets can actually harmonise, motivate and control internal aspects of the business.

iii.) BENEFITS OF THE BEYOND BUDGETING APPROACH In response to a large majority of firm’s dissatisfaction at the failures of traditional budgets, the Beyond Budgeting approach has emerged as a viable modern alternative to support management in the successful planning and implementation of strategies (Rickards, 2006).

Requiring a complete shift in the management style of the company, Hansen (2011) theorized the move to beyond budgeting as being possible within two stages; moving the firm towards competitor based performance evaluation and then implementing a decentralized structure.

The Beyond Budgeting movement represents an extreme approach, however if implemented successfully it will allow the firm to reap the rewards (Player, 2003). One key problem area it successfully navigates is managerial rewards under traditional methods. Instead of the stereotypical approach of having targets and rewards set internally, this system requires rewards to be more relative to the company’s actual performance in correspondence to market competitors and specific benchmarks. Furthermore, as highlighted in an interview between Daum and Hope (2003) Beyond Budgeting is a more adaptive approach to business, pushing decision making and authority away from just the management and allowing lower level employees to contribute, a significant factor in increased employee productivity and motivation. Ostergren and Stensaker (2011) state that empowering lower level employees in strategic decision making will not only lead to increased employee participation, but it will also free up large portion of managers time in order to focus on value-­‐adding activities rather than simply working on the budget.

Page 4 of 9

Oliver Conroy C1218229

Management Accounting & Control BS3517

A key aspect of the movement relates to the work conducted by the Beyond Budgeting Round Table (BBRT), a network of organisations who have a common interest in improving the quality of planning, control, forecasting and overall company performance in a developing, saturated and extremely complex market. Daum (2002) states that the BBRT formulated 12 guiding principles -­‐after conducting a study of 14 companies without budgets-­‐ to be a pathway to successfully implementing Beyond Budgeting. These principles have caused many to believe that Beyond Budgeting adoption creates a more responsive, consumer-­‐based firm. Rothberg (2011) believes that a firm applying the principles of Beyond Budgeting are likely to see continuous improvement in overall performance and also shareholder value.

iv.) SVENSKA HANDELSBANKEN CASE STUDY Rickards (2006) believes that the radical approach adopted in the 1970s by the Swedish firm Svesnka Handelsbanken was the birthplace of the Beyond Budgeting movement. In the midst of a severe crisis, a new management team decentralized operations and abandoned traditional budgeting techniques (Hope and Fraser, 2003) in order to allow the company to prosper. Creating a flat and simple organisational structure, partnered with internal information being allowed to flow freely, eliminated the restrictive nature of traditional budgets and meant that employees were no longer subject to rigid predetermined plans and ultimate fear of not meeting set targets. The system implemented meant that every branch of the bank was considered its own profit centre, ultimately allowing the bank to develop into not only a national leader, but also a global leader in this industry.

v.) CRITISCISMS OF THE BEYOND BUDGETING APPROACH Although there are many benefits from the implementation of Beyond Budgeting, research has discovered numerous reasons why widespread adoption has not taken place. Pilkington and Crowther (2007) discovered that due to small firms not having the resources to train staff in new concepts, the management capabilities and simply the size of the firm not being suitable they could not implement this technique, meaning that only companies of 1000+ employees have generally adopted Beyond Budgeting, contradicting Hope and Fraser’s argument that budgeting should be abolished in all companies as not all of them have the capabilities to implement their radical alternative.

Page 5 of 9

Oliver Conroy C1218229

Management Accounting & Control BS3517

Rickards (2006) argues that the simple reason behind widespread adoption of the Beyond Budgeting movement not taking place corresponds to its failure to actually provide management with any new ideas; it has simply repackaged current management processes in a bundle of conceptual ideas and tried to market it as a new alternative. Its ultimate failure of convincing controllers to implement its strategy has also led to further criticisms to be brought into the spotlight. A CIMA (2007) article believes that a company having no budget at all would create problems, rather than fix them as Hope and Fraser et al believed, due to the complete absence of a control framework which could ultimately lead to a lack of direction in the companies operations. Furthermore, one key factor impacting a company’s decision not to implement Beyond Budgeting corresponds to a fear of change, which is even more noticeable in a stereotypical top-­‐down hierarchy. High-­‐ups will not want to delegate activities to people below them in the fear of being outperformed, and the low-­‐level employees could shy away from new responsibilities in the fear of angering the ‘boss’.

Ultimately, the Beyond Budgeting approach is not without its criticisms, as is the case with any new management technique. A simple lack of evidence and case studies on the success of implementing the system has caused many firms to be sceptical of adopting it. Although it still remains a key topic of management accounting literature and theory, Libby and Lindsay’s (2010) argument that traditional budgeting should remain central to a firms control system is strengthened by these failures.

vi.) BETTER BUDGETING

In response to all the arguments and counter-­‐arguments supplied by supporters of both sides of Beyond Budgeting, the concept of Better Budgeting emerged as an alternative. Supporting Dugdale and Lyne’s (2005) survey findings that over 60% of firms claimed to be currently improving or planning to improve the budgeting process. Better Budgeting provides firms who want to keep a formal budgeting system in place, or those who cannot handle a complete culture change, with a stepping-­‐stone towards greater decentralisation whilst not requiring a complete overhaul of established systems. Adams, Bourne and Neely (2003) believe that Better Budgeting entails five potential techniques that can be used to combat limitations of traditional methods: Activity Based Budgeting, Zero Based Budgeting, a Value Based technique, Profit methods and Rolling Page 6 of 9

Oliver Conroy C1218229

Management Accounting & Control BS3517

Budgets. Goode and Malik (2011) state that this could actually damage one of the things it set out to improve: excessive use of management time to implement new control methods.

Better Budgeting is seen by many as a more viable alternative to traditional methods than Beyond Budgeting, however due to its relative status as a new and untested method, Better Budgeting would still require copious amounts of research and practical analysis to make a significant impact on this debate.

vii.) CONCLUSION To conclude, although Hope and Fraser and all the other advocates of the Beyond Budgeting movement have put together documents highlighting the failures of the traditional budgeting, they do not create a perfect substitute that could be universally adopted. It needs to be stated that the Beyond Budgeting movement is a vital and necessary aspect of management accounting in the modern environment and will continue to play its part, however it is more feasible in most cases to simply develop the budgeting techniques already employed for numerous reasons. This is simply because budgeting is so embedded in business culture firms would struggle to completely abandon it. The emergence of Better Budgeting – even though it is still in early development (Rickards, 2006)-­‐ could provide a more viable alternative, as it simply calls on a firm to improve the management system in place rather than completely remove it.

Putting it simply, Libby and Lindsay’s belief that the traditional budgeting process should remain in a key role in management control systems of firms is correct, however there is no doubt that in order to continue being as prevalent as it has been change is needed in order for it to be completely useful in the modern environment.

Page 7 of 9

Oliver Conroy C1218229

Management Accounting & Control BS3517

BIBLIOGRAPHY 1. Adams, C, Bourne, M and Neely, A. “Better Budgeting or Beyond Budgeting?” Measuring Business Excellence. 7(3). 2003.

2. Argyris, C. “The Impact of Budgets on People.” Graduate School of Business and Public Administration. 1952. 3. Argyris, C. “Human Problems With Budgets.” Harvard Graduate School of Business Administrations. 1953. 4. Bartram, P. “Forecasting the End For Budgets.” Director. 60(1), 2006. 5. Beyond Budgeting Round Table. Diagram Highlighting the Dissatisfaction With Planning and Budgeting. www.bbrt.org (AS GIVEN IN LECTURE SLIDES) 6. Becker, S, Messner, M and Schaffer, U. “The Evolution of a Management Accounting Idea: The Case of Beyond Budgeting.” 2009. 7. CIMA. Survey Results Highlighting Use of Budgets. 2009. https://learningcentral.cf.ac.uk/bbcswebdav/pid-­‐3408307-­‐dt-­‐content-­‐rid-­‐
5036564_2/courses/1415-­‐BS3517/use%20of%20budgeting%20tools%20figure.jpg

(LAST ACCESSED: 09/03/15) 8. CIMA. “Beyond Budgeting.” Topic Gateway Series 35. 2007. http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_beyond_budg eting_oct07.pdf (LAST ACCESSED:09/03/15) 9. CIMA. “Better Budgeting.” A Report on the Better Budgeting Forum From CIMA and ICAEW. 2004. http://www.cimaglobal.com/Documents/ImportedDocuments/betterbudgeting_join
t.pdf
(LAST ACCESSED:09/03/15) 10. Daum, J. “Beyond Budgeting: A Model For Performance Management and Controlling in the 21st Century.” Controlling and Finance. 2002. 11. Daum, J and Hope, J. “The Origins of the Beyond Budgeting Round Table: An Interview with Jeremy Hope.” The new New Economy Analyst Report. 2004. 12. Drury, C. “Management and Cost Accounting: 7th Edition.” Cengage Learning. 2008.

13. Dugdale, D and Lyne, S. “Budgeting Practice and Organisational Structure.” Research Executive Summaries. 6(4). 2005 14. Ekholm, B and Wallin, J. “Is the Annual Budget Really Dead?” European Accounting Review. 9(4). 2010.

Page 8 of 9

Oliver Conroy C1218229

Management Accounting & Control BS3517

15. Goode, M and Malik, A. “Beyond Budgeting: The Way Forward?” Pakistan Journal of Social Sciences. 31(2). 2011.

16. Hansen, S. “A Theoretical Analysis of the Impact of Adopting Rolling Budgets, Activity-­‐
Based
Budgeting and Beyond Budgeting.” European Accounting Review. 20(2). 2011.

17. Hope, J and Fraser, R. “Who Needs Budgets?” Harvard Business Review. 81(5). 2003.

18. Libby, T and Lindsay, R. “Beyond Budgeting or Budgeting Reconsidered? A Survey of North-­‐American Budgeting Practice.” Management Accounting Research. 21. 2010.

19. Ostergren, K and Stensaker, I. “Management Control Without Budgets: A Field Study of Beyond Budgeting in Practice.” European Accounting Review. 2010.

20. Pilkington, M and Crowther, D. “Budgeting and Control: Technical Matters.” Financial Management. 2007.

21. Player, S. “Why Some Organisations Go Beyond Budgeting.” Journal of Corporate Accounting and Finance. 14(3). 2003.

22. Rickards, R. “Beyond Budgeting: Boon or Boondoggle?” Investment Management and Financial Innovations. 3(2). 2006.

23. Rothberg, A. “Traditional Budgeting vs. Beyond Budgeting: Three Core Differences.” 2011. http://www.cfoedge.com/resources/articles/CFO-­‐Edge-­‐Traditional-­‐Budgeting-­‐ vs-­‐Beyond-­‐Budgeting.pdf (LAST ACCESSED: 09/03/15)

Page 9 of 9