Question

7) Allentown Company has been busy over the first few years of its existence in penetrating its market and gaining a respectable market share. To facilitate this, Mr. Marks, the CEO, and his controller, Mr. Nance, have been developing the annual master budgets. To date, this approach has worked well. Allentown has been acquired by a company in a related business but will continue to operate as an independent subsidiary. The CFO of the acquiring company, Mr. Radisson, has suggested to Mr. Marks that, since it was expected that his company would continue to grow, it adopt a departmental budgeting system; a suggestion Mr. Marks agreed to readily. Mr. Radisson explained to Marks' departmental managers the concepts of a departmental participative budgeting system and their involvement. The managers were encouraged to take the information and come back with suggestions which could then be put into a formal budget process. Required: a. What benefits will accrue to Mr. Marks under this new budgeting system? b. What behavioral issues might arise for departmental managers and for production workers? c. What is the most probable long-term reaction of Marks' people to the participative budget system?

Answer 1

01.

Master Budget :- The master budget is the total of all lower-level budgets prepared by a company's various operational areas. Master budget also includes budgeted financial statements, a cash forecast, and a financing plan. In master budget an explanatory text may be included which explains the company's strategic Direction and Policy how the master budget will assist in gaining its specific goals, and the management actions needed to achieve the budget.

The Basic advantages of budgeting include:

• Planning orientation.
• Assumptions review.
• Cash allocation.
• Performance evaluations.
• Profitability review.
• Funding planning.
• Bottleneck analysis.

But with the help of departmental budgeting system the budgeting will be decentralized and by this the budgeting will be more accurate.

With help of Departmental Budgeting system responsibility also distributed so it will also increase efficiency of company.

By Departmental budgeting system loss giving department will be known so that department will be closed than the profit of Company will increase.

02.

Any changes in organisation will be opposed every time by Workers and Managers. If the company will change its Budgeting System than Department manager will oppose and also Workers will also oppose. the main reason for opposition is that their responsibilities also increases. so they have to work more better otherwise there department may close if these are loss making units.

03.

Long term benefits of Participative budget system

01. Emphasize on decision makink.

02. Orientation on cost benifit nlysis

03. Improvement for next period.

04. Discontinuation of obsolete process.

05. Discontinuation of Loss making uniits

06. Efficiency in resource allocation.

07. Enviroment changes will be easily adapted