MN30469 Advanced Management Accounting
Lecture 6 – Beyond Budgeting
Question
It has been claimed that there are many problems with traditional budgeting practice. New
approaches to budgeting (i.e. Activity-Based Budgeting and Beyond Budgeting) are widely
promoted as techniques that can overcome these problems.
Discuss this statement in light of published research.
ANSWER
A budget is management’s coordination and quantification of the various activities
within a company into a plan. ACCA defines a traditional budget (TB) as the fixed
plan in accordance with which all management processes are based and aligned. It
has recently been accused of being incapable of meeting the challenges of the
information age (Hope and Hope, 1997). As a result, new approaches to budgeting
(ie Activity-Based Budgeting and Beyond Budgeting (BB)) are widely promoted to
overcome these problems.
The case against TB has been argued most forcefully by Hope and Fraser (2003)
and Ekholm and Wallin (2000). Budgets prepared under traditional processes require
too much management time. It leads to extrinsic, not intrinsic motivation of people
and causes distortion of management behaviours. Furthermore, TB encourages rigid
planning and a lack of flexibility, thus, it may not be appropriate in today fast-moving
business environment. While budgetary gaming might be rational to managers, they
are not so for shareholders who prefer to maximise performance in every year. Also,
the fact that a budget is not aligned with the strategy puts it out of kilter with the
competitive demands facing firms. Moreover, an annual budget has insufficient
external focus and ignores key drivers of shareholder value by focusing too much on
cost reduction and short-term value (Antos, 1999).
In the current dynamic business context, innovation is considered as a determinant
of corporate success. Organisations need to find a new model that effectively
empowers front-line managers to make fast decisions based on current information
(Hope and Fraser, 2000). To create new wealth, firms need both the benefits of
effective devolution and effective performance management (Wallander, 1999).
BB consists of 12 principles and 2 underlying concepts. BB is flexible, do not rely on
obsolete figures and should result in more timely allocation of resources. It makes
use of non-financial measures, encourages managers to react to the environment
and evaluate their performances based on relative performance contracts with
hindsight (Hope and Fraser, 2003). BB may also incorporate benchmarking linking
managers’ targets to external benchmarks.
TB is still used by a majority of firms for control purposes and perceived added
value. A survey in North-American firms showed that time spent on budgeting is
MN30469 Seminar 7 Q 1
Lecture 6 – Beyond Budgeting
Question
It has been claimed that there are many problems with traditional budgeting practice. New
approaches to budgeting (i.e. Activity-Based Budgeting and Beyond Budgeting) are widely
promoted as techniques that can overcome these problems.
Discuss this statement in light of published research.
ANSWER
A budget is management’s coordination and quantification of the various activities
within a company into a plan. ACCA defines a traditional budget (TB) as the fixed
plan in accordance with which all management processes are based and aligned. It
has recently been accused of being incapable of meeting the challenges of the
information age (Hope and Hope, 1997). As a result, new approaches to budgeting
(ie Activity-Based Budgeting and Beyond Budgeting (BB)) are widely promoted to
overcome these problems.
The case against TB has been argued most forcefully by Hope and Fraser (2003)
and Ekholm and Wallin (2000). Budgets prepared under traditional processes require
too much management time. It leads to extrinsic, not intrinsic motivation of people
and causes distortion of management behaviours. Furthermore, TB encourages rigid
planning and a lack of flexibility, thus, it may not be appropriate in today fast-moving
business environment. While budgetary gaming might be rational to managers, they
are not so for shareholders who prefer to maximise performance in every year. Also,
the fact that a budget is not aligned with the strategy puts it out of kilter with the
competitive demands facing firms. Moreover, an annual budget has insufficient
external focus and ignores key drivers of shareholder value by focusing too much on
cost reduction and short-term value (Antos, 1999).
In the current dynamic business context, innovation is considered as a determinant
of corporate success. Organisations need to find a new model that effectively
empowers front-line managers to make fast decisions based on current information
(Hope and Fraser, 2000). To create new wealth, firms need both the benefits of
effective devolution and effective performance management (Wallander, 1999).
BB consists of 12 principles and 2 underlying concepts. BB is flexible, do not rely on
obsolete figures and should result in more timely allocation of resources. It makes
use of non-financial measures, encourages managers to react to the environment
and evaluate their performances based on relative performance contracts with
hindsight (Hope and Fraser, 2003). BB may also incorporate benchmarking linking
managers’ targets to external benchmarks.
TB is still used by a majority of firms for control purposes and perceived added
value. A survey in North-American firms showed that time spent on budgeting is
MN30469 Seminar 7 Q 1
