P1 Exam Dumps : Management Accounting

A purposes of budgeting is to act as a control mechanism, with actual results being compared against budget.

Another purpose of a budget is to set targets to motivate managers and optimize their performance.

The participation of managers in the budget setting process has several advantages. Managers are more likely to be motivated to achieve the target if they have participated in setting process has several advantages. managers are more likely to be motivated to achieve the target if they have participated in setting the target.

Participation in budget setting can reduce the information asymmetry gap that can arise when targets are imposed by senior management. Imposed targets are likely to make managers feel demotivated and alienated and result in poor performance.

Participation in budget setting can cause problems; in particular, managers may attempt to negotiate budgets that they feel are easy to achieve which gives rise to “budget padding” or budgetary slack.

Managers will not ‘empire build’ because they don’t believe that the size of their budget reflects their importance within the organization.

The budget acts as a variable mechanism, with actual results being compared with budget.

Budgeting forces an organization’s management to look ahead and set performance targets.

The budget provides an external benchmark against which performance against which performance can be evaluated.

The budget ensures actions of different parts of the organization are coordinated are reconciled otherwise managers take actions for the benefit of their own part of organization that may not benefit the organization as a whole.

Another benefit of budgeting is to set targets to motivate managers and optimize their performance.

The budget is a useful device of influencing an operator’s thoughts and motivating operators to perform in line with the organization’s marketing budget.

It provides a standard which managers may be motivated to achieve. It can also encourage inefficiency and conflict between managers particularly if the budget is imposed from above, whereby it may act as a threat rather than as a challenge.

Co-ordination

Communication

Profit maximisation

Diversification

Authorization

Consolidation