Strategy and the Master Budget
10-1 Emerson Electric Company © Joseph San Miguel, reprinted with permission.
10-2LetsGo Travel Trailers (Source: “LetsGo Travel Trailers: A Case for Incorporating the New Model of the Organization into the Teaching of Budgeting,” by Sally Wright, Cases from Management Accounting Practice, Vol. 14, Montvale, NJ: Institute of Management Accountants, 1998). Note that part 2 of this case requires the use of Excel.
10-3Building Processes for a Solid Foundation: The Case of Community Health Initiatives (Source: Sandra Richtermeyer, Strategic Finance, August 2007, pp. 52-57. Note: this case was the case used as the 2008 IMA Student Case Competition. The Student Case Competition is sponsored annually by the IMA to provide an opportunity for students to interpret, analyze, evaluate, synthesize, and communicate a solution to a management accounting problem.)
10-4Academic Advising at Bay State (Source: Janice E. Bell and Shahid L. Ansari, Strategic Finance, September 2008, pp. 44-51. Note: this case was the case used as the 2009 IMA Student Case Competition. The Student Case Competition is sponsored annually by the IMA to provide an opportunity for students to interpret, analyze, evaluate, synthesize, and communicate a solution to a management accounting problem.)
10-1: “How to Set Up a Budgeting and Planning System” by Robert N. West and Amy M. Snyder, Management Accounting (January 1997), pp. 18-20, 22, 24.
This article demonstrates the setting up of a budgeting and planning system for Penn Fuel Gas Inc., a public utility holding company that provides natural gas storage and transportation services. It stresses the need to review the chart of accounts, account classification and the reporting system of the firm. The discussion includes factors to be considered in the budgeting process and moves to update its current accounting information system.
1.What motivates PFG to install a budgeting and planning system? 2.Why is flexibility very important for PFG’s budgeting system to be effective? 3.What problems that the budget manager at PFG had to resolve before setting up a budgeting system? Do you find these problems unique to PFG? 4.Why the authors suggest that a thorough review of the firm’s chart of accounts, account classifications, and reporting systems is a must before initiating a budgeting and planning system? 5.Describe budgetary games that people play. What are the reasons for PFG to experience minimal budgetary gamesmanship?
10-2: “Strategic Budgeting: A Case Study and Proposed Framework” by Audrey G. Taylor and Savya Rafai, Management Accounting Quarterly (Fall 2003), pp. 1-10.
This reading applies the Critical Chain technique proposed by Eliyahu Goldratt to budget preparations. All department budgets are reduced by 50%. The savings are grouped in a Group Budget Buffer. Department heads can request additional funds from the buffer but the request would be discussed openly with other department heads. This reduction method allows costs to be cut where the cuts will not negatively impact performance of the service departments. At the same time, it identifies areas of bloat where cost reduction can be significant increases communication between departments, lowers overall spending levels, and assures output integrity.
1.What is the lawnmower method of cost reduction?
2.What will be the size of a division’s total budgeted amount after 4 years if the division includes 10% slack each year? After 10 years? 3.What is the strategic budgeting model?
4.What are the strengths of strategic budgeting?
10-3: “How Challenging Should Profit Budget Targets Be?” by Kenneth A. Merchant, Management Accounting (November 1990), pp. 46-48.
The article argues for using highly achievable budget targets, and explains six key advantages for doing so, including the...