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Traditional Budgetting

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Traditional Budgetting

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Advanced Management Accounting

Essay: “Traditional budgeting is counterproductive in today’s fast paced and highly competitive environment. Instead of tinkering with current budgeting systems, managers would be better off abandoning budgeting altogether – that is, companies should move beyond budgeting.” Discuss

Introduction

In the worsening economic conditions we live in today the question of the efficiency of budgets is constantly being discussed. “The usefulness of budgets has generated much recent discussion and debate. Though budgets are useful for coordination, communication, and performance evaluation, many people consider them the cause of gaming and earnings manipulation by managers, time-consuming and costly to develop, and a barrier to change.”(Murray-Lindsay and Libby, 2007) Van Mourik (2006) states, “Research suggests that 80% of companies are dissatisfied with their planning and budgeting processes and it has been estimated that these processes use up to 20% of all management time.” Research completed by Schmidt (1992) states, “In a study of 10 large energy, transportation and banking companies, we found that, on average, the equivalent of 5% of all staff employees were devoted full-time to budgeting activities. At one of these companies, which has a staff-support team of 3,000 employees, 160 employees devote time to aspect of budgeting. “Total budgetary costs in this company “may exceed $20 million a year”. I believe if a company is investing this much time and money in the process they should trust it whole heartedly but alas even a company with that much committed to the process are voicing their concerns at the process. Jack Welch, former CEO of General Electric, is attributed as saying, “the budget is the bane of corporate America.” (Daum, 2002) There are those that plump for the abolishing of budgets altogether, “Budgeting, as most corporations practice it, should be abolished. That may sound like a radical proposition, but it...