The budgeting process may be approached differently in various firms. Top-down b

Question

The budgeting process may be approached differently in various firms. Top-down budgeting has its inception with directives from senior management who prepare the budget for staff and assess performance based on objectives established at higher levels. Any additional compensation received occurs as a result of achieving budgetary targets imposed by others. In contrast, bottom-up budgeting reflects the predictions of cost, revenue, profit, and investment center managers—proposed and approved by senior managers. Incentives are negotiated by managers proposing the budget rather than imposed by higher level executives.

Answer the following question:

1. Should managers be commended for achieving favorable overhead spending, efficiency, and production volume variances? Rationalize your response.

Explanation / Answer

Bottom line of any profit earning organization is to earn more revenues, reduce cost, efficient utilization of resources and effectiveness of its products in the markets. So, one of the ways to achieve these goals is by setting these things as a measure of performance for the respective managers. like earning reveune is the target for sales and marketing teams, reduction of cost and efficient utilization of the resources is the target for the production team etc.,

In order to measure these performances, there should be certain bench marks against which the actual achievments are assessed and either rewarded or viceversa. These bench marks are nothing but the budgets, when these budgets are set an analysis is done for what is the expected profit, what are the expected costs, what are the expected resources, etc.,

So, it is commenable that managers are rewarded for achieving favourable overehead spending, efficiency and production volume variances. If there is favourable overhead spending it means that actual overhead spending is less than the budgeted spending expected and similarly if the efficiency is favourable it means that the output is more than budgeted for actual hours employed and if the production volume variance is favourble it means that with the given resources the production done is more than budgeted.

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