Chapter 6 And 7 (Budgeting) Flashcards
What are targets used for in bonus contracts?
Targets are used as benchmarks for performance evaluation and as instruments for planning, coordination, or resource allocation.
Focus on the decision-influencing use in bonus contracts.
What is ‘target difficulty’?
Target difficulty refers to the challenge level of reaching the predefined target level.
It is a central element in target setting.
How are targets established for variable compensation?
Targets can be established from:
* Internal sources (budgets, peer group, past performance, discretionary)
* External sources (absolute benchmarks, relative peer group)
See also Chapters 7 and 8.
What is a ‘hurdle bonus’?
A hurdle bonus is paid if a threshold is reached (target or a certain percentage of the target).
This is a common structure in variable compensation involving targets.
True or False: Caps on bonuses are consistent across all industries and countries.
False.
The existence of caps can strongly depend on the industry and the country.
What is the principal’s problem in setting targets?
The principal has to rely on her own assessment of the agent’s performance potential, as the agent has no incentives to communicate the truth about expected outcomes.
This is particularly problematic when there is information asymmetry.
Define ‘ratcheting’ in the context of target setting.
Ratcheting is when principals rely on last year’s target achievement to set the new target, often revising targets upwards based on past performance.
This can lead to asymmetric adjustments of targets.
What are the motivational effects of using targets?
Motivational effects include directing attention and effort, increasing persistence, and energizing effort towards achieving goals.
Difficult specific goals have the strongest motivational effects.
What is Goal Setting Theory?
Goal Setting Theory posits that specific and difficult goals lead to higher performance compared to common exhortations to ‘do your best’.
It is based on empirical research.
What are the key factors improving goal commitment?
Factors include:
* Importance of goal attainment
* Public commitment
* Vision (leadership)
* Participation
* Rationale
* Self-efficacy
These factors enhance the likelihood of achieving difficult goals.
List the criticisms of budgeting from practitioners.
Criticisms include:
* Budgets become outdated quickly
* Budgets are too detailed and expensive
* Budgets stifle initiative and innovation
* Budgets reinforce command and control
* Budgets demotivate employees
* Budgets can encourage unethical behavior
These points reflect common frustrations with traditional budgeting practices.
What are the functions of budgeting?
Budgeting functions include:
* Operational planning and coordination
* Motivation and performance evaluation
* Communication of goals and strategy formulation
These functions encompass both decision-facilitating and decision-influencing purposes.
Fill in the blank: A budget is the quantitative expression of a proposed plan of action by management for a specified period that is set as a _______.
[target]
This definition emphasizes the role of budgets in management accounting.
What is the dilemma of participation in budgeting?
The dilemma of participation refers to the conflict between involving employees in the budgeting process and maintaining control over budgetary outcomes.
This can affect the effectiveness of budgeting as a motivational tool.
What is the optimal budget level for planning?
The optimal budget level minimizes expected planning costs by balancing the costs of under- and over-fulfillment.
This involves setting a planning budget that accounts for potential deviations.
What is the relationship between goal difficulty and performance?
Higher target difficulty increases performance up to a certain level, after which performance may decrease if limits of ability are reached.
This is a key finding of Goal Setting Theory.
What is the motivation perspective in performance evaluation regarding budget setting?
Where to set budgets
What are the trade-off criteria from an economic perspective in budgeting?
Financial incentives
What are the trade-off criteria from a goal-setting perspective in budgeting?
Motivational perspective
What is the suggested solution for the dilemma of participation in budgeting?
Use different budgets for planning and performance evaluation
What evidence supports the use of separate budgets for different functions?
Umapathy (1987) and Arnold and Artz (2019)
What do firms typically do regarding budget levels for different budgeting functions?
The majority does not set separate budget levels despite conflicting trade-offs
What is the dilemma of participation in budgeting?
Problems of budgeting from a practitioner’s perspective
Fill in the blank: Budgets are determined top-down by _______.
[headquarters based upon strategic planning activities]
Fill in the blank: Budgets are determined at the bottom levels and combined at _______.
[higher levels]
What is participative budgeting?
Active participation of subordinate managers
What are some problems associated with budgeting according to Hansen et al. (2003)?
- Budgets are out-of-date within a few months
- Budgeting is too detailed and expensive
- Budgeting stifles initiative and innovation
- Budgeting reinforces command and control
- Budgeting demotivates people
- Budgeting encourages unethical behavior
True or False: Budgeting encourages ethical behavior and reduces reputational risk.
False
What percentage of management time do budgeting processes typically absorb?
Around 20 percent
What can lead to unethical selling and ‘creative’ accounting in budgeting?
Aggressive targets and incentives
What is the focus of Chapter 7 in the provided content?
Budgeting and its functions
What is a common outcome of many firms revising targets for planning and performance evaluation?
Separate budget levels at the end of the year
What are the three approaches to budgeting mentioned?
- Top-down
- Bottom-up
- Counterflow (mixed)
What is the main critique of traditional budgeting processes?
Budgets were designed to manage the organization from the center
What type of budgeting process allows for interaction between headquarters and decentralized units?
Counterflow (mixed)
