AC5870 Week 10 - Budget analysis.ppt

Learning Curve effect * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Standards for the budgets learning effect only applies to direct labour costs and those variable overheads that are a direct function of labour hours of input. It does not apply to material costs, non-variable costs or items vary with output rather than input LCE = time basis no effect on piece rate Budget slack It is defined as the difference between the minimum necessary ?costs and the costs built into the budget or actually incurred Effects:- 1. Overestimate costs i.e. never adverse variance The ?personal ?goals of managers (personal income, ?size ?of staff, power) will often lead to a bargained budget whereby manager intentionally create slack as protective device 2. Overspending to meet budget otherwise they may be blamed for careless budgeting ie spending non-essential expenses Budget slack Assuming that you are the sales managers of your organization, you may prefer intentionally underestimating revenues or overestimating costs (i.e. Padding the budget means) It is quite political since no one wants to be blamed it reflects your status and bargaining power in the organization Everyone wants to protect their own budget Aspiration level Level of performance that each individual gives his commitment and acceptance as a reasonable goal for himself or his dept when this level of performance is achieved he will feel personal success Relationship between performance, standard, aspiration level too loose for easy standard = worst result, low performance too tight for difficult job = non-achievable low performance asked to set aspiration level for difficult target = best Aspiration level It is important to link budgets to aspiration levels in order to achieve goal congruence between organizational goal and those of the employees The important implicati