Quiz 6, 11/7/12
Answer on the back of the second evaluation form or a
plain sheet if you were in that presenting group.
Four easy questions…
6-1
1. Which of the following is not a quote from “Corporate Budgeting is
Broken…”?
A.
[T]he budget process itself isn't the root cause of the counterproductive
actions; rather, it's the use of budget targets to determine compensation.
B.
The kinks in the pay-for-performance line-caused by the minimum hurdle
bonus and the maximum cap-create strong incentives to game the
system.
C. Curvilinear compensation plans are just as good, and often better, than
linear plans. [He makes exactly the opposite point.]
D. Setting extremely aggressive stretch goals, as is so common in business
today, can itself have damaging repercussions.
E.
6-2
All of these are quotes from the article.
2. Which of the following is not discussed in the “Transfer
Pricing” reading assigned for today, from the Garrison
et al. book?
A. Negotiated transfer pricing.
B. Cost-based transfer pricing.
C. Market-price-based transfer pricing.
D. International aspects of transfer pricing.
E. None of the above (all are discussed).
6-3
3. Answer for a presentation today other than
your own (indicating A or B):
A.
Will Wu & Zachary McCallum: Is Performance-Contingent Incentive Pay the
Best Way to Motivate Managers?
B.
Laurie Whiteside, Ling Zhang, & Nicole Wheetley: Budgeting for International
Operations
Write two or three sentences summarizing what you consider
the most important factual information that you learned from
the presentation.
6-4
4. Who was re-elected President of the
United States yesterday?
A. Barack Obama.
B. Mitt Romney.
C. Calvin Coolidge.
D. Ralph Nader.
6-5
Hint:
Thoughts on Budgeting
ACCT7320 Fall 2012 Bailey
6-6
Purposes of Budgeting
 Stimulate concern for the future
 Provide a framework for delegation of
authority & responsibility
 A financial model to test plans against
 A communication device
- to relay top management’s style & authority
- establish organizational climate
- the dialogue is what’s important
 Motivation?
6-7
Purposes of Budgeting
 These purposes may conflict. E.g., the best motivator may not be
the best expected performance for planning cash flow, etc.
 Target shown on budget  ? Expected attained performance
 So, should there be separate budgets for motivation vs. planning?
Or a range of budgets with different levels of probability?
6-8
Attitudes
 Attitudes toward budgets tend to be negative.
 Chris Argyris, The Impact of Budgets on People, 1952
 Neg. attitudes towards accountants and budgets
 Recommended participation in the budgeting process as a cure;
generally supported by later research
6-9
Research on “Participation”
 Participation represents a spectrum
open process of
group decision making
Consultation only;
centralized decision making
 Studies show greater likelihood that managers will carry out
their “own” plans, than imposed plans.
6-10
Participation
 But care is needed in generalizing from the research studies
 E.g., Some studies involved a change from authoritarianism to some
participation
- May not generalize to a change from some to much participation
 Current research approach is to consider the underlying processes
& conditions
6-11
Effects are more complicated
Participation
Improved group
cohesiveness
Prevailing Group Attitudes
Worse productivity?
6-12
Better productivity?
Effectiveness
 Additionally, the effectiveness of participation may depend
upon:
 Nationality
 Ethnical attitudes
 Personality types of workers, supervisors
 Access to information (centralized, dispersed)
 Type of decision (e.g., close down plant)
6-13
Forecasting of Revenues, Costs
 Sales
 The key figure!
 Determines: production level
plant needs (expand?)
selling & admin expense
6-14
Methods of sales forecasting
Judgmental estimates by key executives, sales force
2. Trend analysis
a) “we've been growing 10% per year”
b) Mathematical time series
Sales example, Dept. store:
1.

Sales = f(St-1,St-4)
Qtr
Details are complicated
Methods
3.
Correlation (regression) analysis (Not in time series.
Just
a
correlation.)
.
#Refrig.
Sold = y
.
.
.. . . . .. .
... . . .
.
. .. . .
x = # Housing starts in previous year
y = a + bx
6-16
Methods
6-17
4.
Multiple regression

y = a + b1x1 + b2x2 + b3x3 etc.

E.g.,
y = tire sales by Uniroyal
x1 = new cars to be manufactured
x2 = new cars made 3 years ago
x3 = GNP (or DPI)
Methods
5.
Market share analysis
(co's % of mkt) x (total industry forecast)

E.g.: pharmaceutical firm has 20% of market;
 all legitimate drug sales = 1% of DPI
 20% x 1% x DPI forecast = our sales forecast
6-18
Budgeting, continued…
 Discuss “Corporate Budgeting Is Broken”
6-19
Kinks
p. 97
6-20
Linear!
P.98
6-21