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Report on Budgetary Control System

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Introduction

TRESCOTHICK LIMITED From: 050201820 FAO: Managing Director RE: Budgetary Control System Monday 11th December 2006 Report on Budgetary Control System Introduction The aim of this report is to identify and assess problems with the budgetary control system that is currently in operation within Trescothick Ltd, and to determine any effects that the system is having within individual departments and on the company as a whole. A further aim of the report is to provide recommendations to you as to how the system could be improved and what possible effects these improvements could have within Trescothick Ltd. The structure of this report is indicated by the inclusion of sections and sub-sections and relevant sections will be linked together. There shall be a conclusion at the end of the report which is intended to reiterate what the report has determined. My recommendations as to what the company should do to improve the budgetary control system that is currently in place within Trescothick Ltd are situated towards the end of the report. They include manager participation and a change in the performance evaluation style, with an emphasis placed on long-term objectives of the organization. Problems with the Current Budgetary Control System Compromises Product Quality The current system involves 'tightening' a department's budget slightly every time a previous budget is met. According to the assembly department manager, this is having an effect on the quality of products. ...read more.

Middle

Therefore, managers, as seen with the assembly manager in this case will compromise other responsibilities in order to meet the budget because their individual performance is measured in this way. In terms of Trescothick Ltd, both the assembly manager and the maintenance manager are guilty of this. The above two sections can both be linked in here. Product quality is being overlooked in the assembly department and important maintenance work is being overlooked in the maintenance department. Things will only get worse from here. The managers in both departments are meddling with their responsibilities in order to meet the budget. Thus, if one department struggles to reach their budget for a certain month and the manager decides to manipulate quality or production, etc in order to succeed in meeting the budget, then the following month's budget will be even more difficult to reach because of the 'tightening' system that is currently employed. To succeed in maintaining the budget, manipulation will take place again meaning that the quality of the product, maintenance of machinery and even employee morale and motivation will decline even further. Hostility towards the budget may soon appear. When using this method of budgeting, as Hopwood (1976) stated, budget data are used in a rigid manner in performance evaluation. Hopwood's research in this field is in agreement with Argyris' research that was conducted in 1952. Argyris (1952) found that supervisions in his study perceived budgets as sources of pressure and tension. ...read more.

Conclusion

The preparation of the budget should be a 'bottom up' process. This means that the budget should originate at the lowest levels of management and be refined and coordinated at higher levels. The justification for this approach is that it enables managers to participate in the preparation of their budgets and increases the probability that they will accept the budget and strive to achieve the budget target. The current performance evaluation report is based upon a high RAPM. Research has shown that, in this situation, budget participation is likely to lead to higher subsequent performance. The recommended performance evaluation style will still involve a degree of RAPM, although not to the extent of the current system. However, participation is an excellent method to help the budgetary control system be a success, therefore it should be implemented when preparing future budgets. 'Tightening' Method When the company decides to 'tighten' the budget, it may be worth taking into account certain considerations for example environmental aspects, and costs that are out of management control before issuing a sterner budget for the forthcoming month. Conclusion Thus, the company needs to study the current budgetary control system and take note of the serious problems it is causing not only in departments, but throughout the whole of the organization in terms of product quality, decisions on workload and general morale and motivation amongst staff within the company. Corrective action needs to be taken to improve the current system and my recommendations of changing the performance evaluation style and the participation of managers when preparing the budget should be thoroughly considered. ...read more.

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