ACC202AssignmentsWeek 4 - Discussion 1

Budgeting is an organization tool that allows management to create a link between planning and control functions. However, due to increase in complexity of organization and operating structure, organizations are shifting towards more decentralized forms of existence which provide for autonomous operations within the business units. Decentralized operations provide the organization with benefits such as: Greater flexibility in decision making, customer focus, specialized leadership, innovation and learning. Staff members are also motivated since decentralized operations allow them to participate in decision-making and are able to see what role they play in the attainment of overall objectives of the organization.

As more and more businesses continue to decentralize, executive management has to find a way of maintaining control over operations. Traditional budgeting initially allowed executive management to control what mid-management and low-level management did. This involved dictating what was expected of them through fixed targets in line with organization’s objectives. It is important to note that this is neither a critical function of executive management and that the executive management is not expected to keep up with the changes in business environment on a day-to-day basis. As such, their budgets are removed from the dynamic nature of business environment. Which is more, variance studies become weaken if the assumptions made while setting planned targets do not hold in the actual business environment. Mid and low level management become solely focused on meeting and exceeding the targets set especially because their performance and remuneration may be pegged on these targets. They may be forced to manipulate performance indicators and standards within the organizations such as level of activity to indicate a more than optimistic performance at the expense of sustainable growth.

Beyond budgeting transfers the responsibility of coming up with budgets to business unit teams. These units are expected to be on top of changes in business environment over the budgeted period due to their close proximity to business operations as well as their specialized skills and knowledge. The targets set under beyond budgeting are relative to the previous’ period performance and take into consideration expected changes in the budgeted period. Under Beyond budgeting, the targets are set based on considerations for customers, competition and market. Mid management and low-level management become flexible to unforeseen changes in business environment since they operate their budgets independently. One key advantage of beyond budgeting over traditional budgeting is performance measurement, whereby the scale against which performance is measured under Beyond budgeting is varied while under Traditional budgeting, the scale is fixed. Some of the performance indicators under Beyond budgeting include industry performance. This allows executive management to focus on their key role of driving organization future performance as opposed to present performance.

Cardos Ildiko Reka & Pete Stefan & Cardos Vasile Daniel, 2014. “Traditional Budgeting Versus Beyond Budgeting: A Literature Review Links to an external site.,” Annals of Faculty of Economics Links to an external site., University of Oradea, Faculty of Economics, vol. 1(1), pages 573-581, July

Rothberg, Arthur F. “Traditional Budgeting vs. Beyond Budgeting.” CFO Edge, 23 Feb. 2018, https://www.cfoedge.com/blog/financial-planning/traditional-budgeting-vs-beyond-budgeting-three-core-differences/.