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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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.Budgets 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) and provide higher-level managers with information about the extent to which those targets have been met (feedback).

One of the principle ways in which senior managers motivate others managers and their employees towards effective performance is by linking organisational rewards to the level of their performance. The impact, which any accounting system has on managerial and employee behaviour, is dependent not only upon its design and technical characteristics but also upon the precise way in which the information is used. It would seem obvious that even a very sophisticated system would be of little efficiency to the company if the information is ignored. According to Hopwood there are three distinct styles of management evaluation using budgets: A budget-constrained style, a profit conscious style and a non-accounting style. The nature of the three styles is applicable to many situations, for the purpose of this essay, however, the following definitions give particular consideration to the use of accounting reports which show the actual and budgeted costs for a cost centre and the difference between them.

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The Budget Constrained Style. This method of evaluation primarily adopts a short-term based evaluation of performance. It uses accounting information as a comprehensive measure of managerial performance. The criterion of performance is stressed at the expense of other valued and important criteria and the manager will receive unfavourable feedback from those above him if targets are not met. For instance if actual costs exceeded budgeted costs or if profits were well below those forecasted.

The Profit Conscious Style. This focuses on the aspects of performance that are, in the long run, more desirable to the organisation. If ...

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