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Hopwood claims that there are three styles of management evaluation using budgets. Discuss these (using illustrations) and some of the dysfunctional effects of using budgeting control systems in large organisations.

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Introduction

Hopwood claims that there are three styles of management evaluation using budgets. Discuss these (using illustrations) and some of the dysfunctional effects of using budgeting control systems in large organisations. Comment on why you think budgeting is prevalent in organisations despite these consequences. Budgets are one of the most frequently used devices for planning and controlling organisations. They are designed and used to provide management with a forward-looking perspective, with which they are able to exploit opportunities and anticipate future problems. A budget itself can be described as a quantitative expression for a set time period of a proposed future plan of action by management.1Budgets are used both as co-ordination mechanism, helping to co-ordinate efforts throughout the sub-divisions of the company and also as a motivational device as it provides incentives for correct action. However budgeting is a major feature of most management control systems and is widely used as a control tool for the following reasons: It provides a benchmark for activity and performance evaluations and it helps to analyse the consequences of particular actions and provides the necessary feedback to the initial plan. For instance, with regards to performance evaluation, budgets are used to provide lower-level managers with well-specified targets (feed-forward) ...read more.

Middle

Accounting reports show how effectively a manager has been in meeting his targets, however they do not show whether or not that manager is trying to reduce long run costs or whether or not his efforts are influencing any other determinants of effectiveness. Non-financial records and personal observations can be used in assessment as well as budgetary reports, but one must use their social skills to gain the insights and experience of his colleagues. With this in mind, it may be possible to state some of the conditions under which a more meaningful distinction between the budget constrained and profit conscious styles can be made: Firstly, the less important economic aspects of performance are to organisational effectiveness, the more the styles will differ. Secondly, they will tend to diverge when not all of the relevant costs are taken into account by the organisation's accounting system and when that system includes incorrect costing. Finally, in light of the last two conditions, the distinction may be influenced by the frequency of reporting deviations from the budget.4 (It is possible that inaccuracies will cancel each other out over time, however the period of time may exceed that which is required for regular feedback and control). ...read more.

Conclusion

However, even in cases where a manager excels himself in his performance, this can be over-shadowed by other people. For instance, prior departments can send poor quality materials, allocated costs can unexpectedly change or an urgent order can mean unscheduled overtime. This is true even when using the profit conscious style. However, with this particular style it is costs that are the focal point. Employees can feel a great amount of pressure to keep costs low or to try and eradicate them completely. Because budgeting focuses upon measurable, quantitative elements of a situation, other elements may be ignored. Budgets may have the effect of making managers concentrate on only the economic interpretations, stifling the possibility of new and innovative interpretations. Despite the varied dysfunctional effects shown above, budgeting is still prevalent in large organisations. This is because it provides a framework in which manager's can plan and control the future of the organisation. Budgeting provides co-ordination and communication within an organisation. Co-ordination forces executives to think of relationships among individual organisations, departments and the company as a whole. Hopwood's Budget constrained style does not agree to this effect, as relationships under this form of evaluation relationships tend to break down. For co-ordination to succeed, communication is essential. Having a formal document such as the budget is an effective way to communicate a consistent set of plans to the organisation as a whole. ...read more.

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