Part D

i) The success of a budget will be determined in large part by the way in which the budget is developed. Had the budget been imposed on Paulo by top management, it will probably generate resentment and ill will rather than cooperation and commitment. This is due to the fact that there is a tendency to feel increasingly pressured in terms of achieving what has been imposed in the budget from above, as nothing else is deemed to be more important. If the budgets are too high and employees know they are unrealistic, motivation will suffer. If the targets allow too much slack, waste will occur. And unfortunately top management is often not in a position to know whether the targets they have set are attainable.

Goals that are perceived as belonging to others are less likely to be internalised, increasing the likelihood of dysfunctional behaviour. For example, in attempting to achieve favourable direct material price variances, Paulo may instruct the purchasing department to purchase larger quantities of materials than needed to obtain quantity discounts. Too much emphasis on shopping around for the lowest prices can also result in a lack of emphasis on quality (i.e. quality of conformance to specifications), excess inventory and an excessive number of vendors. In terms of placing too much emphasis on direct labour rate variances, this might motivate Paulo to assign inexperienced or less qualified workers to the task or not provide workers with the required training, although the resulting unfavourable effect on the efficiency variance is a deterrent to this sort of behaviour. A more serious problem, however, is that labour efficiency variances tend to promote competitive behaviour among lower level managers that can destroy the cooperation needed to optimise the system.

ii) Where a bottom-up (participative) approach to budgeting is adopted,