Discuss the advantages and disadvantages of preparing a participatory master budget.
The concept of budgeting is essential to business management. In theory, the term budgeting is the process of developing a quantitative plan in which an organization identifies its resources and determine ways in by which to use these resources to attain the goals of the organization . Resources that are included in the budget could either be financial or non financial. Thus a budget that includes both the operational budget and the financial budget is referred to a master budget. Depending on the industry that the organization is involved, master budgets tend to have different components, for example a manufacturing business will have a production budget and a financial budget. Other organizations such as governments will have an operation budget and an estimated revenue budget.
The concept of participatory master budget has been introduced in the budgeting process. This is a kind of budgeting process in which the organization allows the employees to participate in the budgeting. In this budgeting process, the management through departmental heads and other lower level management system, request the employees to developed their operational budgets and forward the proposal to senior management for consideration. Top management would then compile the proposals from each department in order to come up with a comprehensive master budget. Thus this ‘bottom-up’ approach kind of budgeting process has been referred to as the participatory.
There are several advantages that can be associated with this kind of budgeting. First, the involvement of the employees implies that the employees will have a sense of ownership of the budget and thus will work towards achieving the provision of the budget. Secondly, utilizing the employees in the budgeting ensures the exact running/operations costs are captured in the budget as some of this would be overlooked if the budget was done by senior management only .
One disadvantage that would emerge from this kind of budgeting process is that employees are likely to abuse this opportunity and overestimate the proposal. Overestimation of proposal occurs where employees are not very happy with current portion of past budgets.
Management by Exception (MBE)
Management by Exception is a new paradigm in business management and is said to be a formulation of Frederick Taylor . This management process uses the ‘Exception Principle’, where all decision making process is handled by lower level management except for situation deemed out of the normal realms. In this sense, lower level management is left to run the day to day operation of business, however should they encounter an exceptional case, this is forwarded to senior management.
The application of management by exception can be applied in several methods. One of the common methods used is standard costing. Here the management allows lower level management to run the business at a standard cost range. Thus in cases where the cost of running the business is low, then senior management may investigate in order to monitor. Similarly, when the cost is higher than the set range, then the management may also intervene to provide control.
Management by exception is said to be widely employed by medical and associated industries. Several medical and pharmaceutical firms employ MBE in running different facets of the health sector. For instance, Mayo Clinic in Minnesota uses management by exception in running it diagnostic department one of the biggest in the country. Here, laboratory manager are allowed to make decisions based on their expertise, however, exceptional cases requires the attention of senior member of staff. For instance, the lack of platelets in a blood smear in a hematological observation is deemed an exception and thus senior management must be involved.
Responsibility accounting
The concept of responsibility is based on the fact that a large diversified business organization is almost impossible to control from a single point of administration. Instead, the management in this concept is required to decentralize the management sector into different segments referred to as responsibility centers. The most common mode of diversification has identified four basic segments/centers, that is, profits center, Cost center, Investment center and Revenue Center. Thus each segment/center is assigned a manager whose role if to run the center to the best possible result based on company projection. For instance, the responsibility of profits rests on profit center manager and thus the specific manager is responsible for any issues regarding profits.
The concept is very effective in providing motivation for different managers. This is due to the fact that responsibility accounting requires that the different responsibility center seem to act independently. Thus a result from these different centers is directly attributable to the responsibility center manager.
However, there is an argument as to the workability of such a stratified business organization. Different scholars have argued that it not possible to fully have independent arm of the same business. In that production department cannot delink itself from sales. This failure of inefficiency in one department may translate to inefficiency in another department.
Qualitative factors in making managerial decisions
Decision making is perhaps the most important concept in business management. It is the responsibility of manager to make investment decisions that will guide the organization in attaining its goals. However, before the business manager makes any such a decision, there are several factors that the manager must consider. Some of the factors that are quantifiable are referred to as quantitative factors and include data such as sales forecasts, break even analysis, Net Present Value analysis, critical path analysis and market research. On the other hand there are unquantifiable factors that are commonly referred to as Qualitative factors.
Qualitative factors are factors that may not be quantifiable in numbers or numeric but nonetheless, they may affect the outcome of a decision. There are three common kinds of analyses under qualitative factors; these are the SWOT analysis, HRM analysis and Pest analysis.
SWOT is acronym for Strengths, Weaknesses, Opportunities and Threats. These kinds of analyses appraise the different impacts of an investment decision for the organization. Thus apart from the financial analysis that is usually performed on business decisions, SWOT analysis reviews the outcome of the decision in such a different context.
Similarly PEST is acronym for Political, Economic, Social and Technological. This is an analysis of the impact of the decision on the above mentioned factors. For instance, under the PEST analysis, the social impacts on the society of a new investment are evaluated.
Finally, HRM is Motivation, Morale and Recruitment. As the factors suggest, this is an analysis that provide insights into the impact of the decision on Human Resource department in the company. This analysis simply reviews the impact of the decision on existing and new employee.
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