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good day sir
By budget padding management hopes to make a budget easier to achieve maybe by reducing the expected revenue and increasing expenditure. I had thought including junior managers in the budgeting process would reduce the level of budget padding in the sense that junior managers will also be part of preparing the budget. how is it that the participation of junior management in setting budgets does not reduce the level of budget padding.
kindly assist
Whoever is preparing the budgets is likely to be rewarded as to how well they perform compared to the budget.
For example, suppose you are the manager responsible for preparing the wages budget. You think that you will need to spend $100,000, so you should budget $100,000.
If you manage to actually spend less than $100,000 you will be doing well.However, since you thought you would need to spend $100,000 it will be difficult to find ways of spending less. So to make sure you appear to be doing well, maybe you will budget $120,000 instead. That way you can be pretty certain of spending less than budget and will appear to performing well.
It doesn’t matter whether the person preparing the budget is junior or senior management – there is always the danger that they deliberately budget more than is needed. This is budget padding.
Whoever is preparing the budgets is likely to be rewarded as to how well they perform compared to the budget.
For example, suppose you are the manager responsible for preparing the wages budget. You think that you will need to spend $100,000, so you should budget $100,000.
If you manage to actually spend less than $100,000 you will be doing well.However, since you thought you would need to spend $100,000 it will be difficult to find ways of spending less. So to make sure you appear to be doing well, maybe you will budget $120,000 instead. That way you can be pretty certain of spending less than budget and will appear to performing well.
It doesn’t matter whether the person preparing the budget is junior or senior management – there is always the danger that they deliberately budget more than is needed. This is budget padding.
wow well explained , so is it proper then to say that there is no way we can avoid budget padding or should we say it can only be prevented when executive management imposes budgets?
Budget padding is always a worry. It is important that senior management are aware of the problem and are therefore thinking about it when they approve the budgets – they should quiz whoever prepared the budget and ask them to justify their figures.
well explained sir , thank you very much.
another question worrying me is on performance measurement. l am finding it hard to differentiate between performance measurement and balanced score card, for instance the following question states:which of the following terms best describes the use of both financial and non financial measures in assessing whether an organisation has achieved its objectives?
A. Balanced score card
B. Bench marking
C. Performance Measurement
D. Target settingl had selected Balanced score card as the answer which happens to be wrong . the correct answer is Performance measurement , kindly explain how.
2. Also l do not understand why in the following question we had to find the present value of the invested amount and add it to the calculated perpetuity:
An investment of $100 000 to be made on 31 December 2017 will produce an annual return of $13 000 in perpetuity, with the first income occurring on 1 January 2018.
what is the net present value of this investment (to the nearest $10) on 31 December 2016, discounted at 10%the answer for question 2 was calculated through finding the present value of the perpetuity then subtracted the present value of investment as follows.
(13 000 divided by 0.1) – (100 000 divided by 1.1) giving 39090 as the answer but l do not understand the logic behind the calculations
In future please start a new thread when you are asking about different topics. (The reason is that we do not give private tuition and are answers for everyone to benefit from – many students search using the topic of the thread).
Performance measurement can refer to measuring any aspect of performance. The Balanced Scorecard specifically includes both financial and non-financial measures.
31 December 2016 is time 0.
Therefore the annual return starts at time 1, and to discount it you multiply by 1/r for the perpetuity.
The investment of $100,000 on 31 December 2017, and is therefore also at time 1. To discount it you multiply by the 1 year discount factor at 10%.
This is all explained in my free lectures.
The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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