Chapter 20, Problem 1QS

Budget motivation C1

For each of the following items 1 through 5, indicate yes if the item is an important budgeting guideline or no if it is not.

_____1. Employees should have the opportunity to explain differences from budgeted amounts.
_____2 .Budgets should include budgetary slack.
_____3. Employees impacted by a budget should be consulted when it is prepared.
_____4. Goals in a budget should be set low so targets can be reached.
_____5. Budgetary goals should be attainable.

To determine

Budget:

It is an estimated financial plan for future time period. It is used by management as an internal tool. It is prepared for a defined period of time.

To identify: Whether an item is important budgeting guideline or not.

Explanation of Solution

1.

Yes, employees should have the opportunity to explain differences from budgeted amounts.

Employees should be given opportunity to explain differences from budgeted amounts as this will motivate the employees. Top management will come to know the discrepancy in their budget. If the discrepancy is genuine then top level management should change the budget.

Hence, it is an important budgeting guideline.

2.

Yes, budget should include budgetary slack.

Budgetary slack is underestimation of revenue or income, or overestimation of expenses in budget. It is done to make it easier for employees to achieve. It makes budget more flexible.

Hence, it is an important budgeting guideline.

3.

Yes, employees impacted by a budget should be consulted when it is prepared.

Employees impacted by the budget should be consulted when it is prepared, as they need to follow that budget. They know the real implications, results of following that budget. They use that budget so they know better than top level management about that budget.

Hence, it is an important budgeting guideline.

4.

No, goals in budget should not be set low to achieve targets.

Setting goals low will de-motivate the employees. They will become lazy and discouraged. So goals should not be set low. They should be such that motivates the employee to work harder and harder..

Hence, it is not an important budgeting guideline.

5.

Yes, budgetary goals should be attainable.

Budgetary goals should be attainable. They should be such that employees should be able to achieve them. They should not be too high as that will discourage the employees and employees will give up. They should not be beyond the capabilities of employees.

Hence, it is an important budgeting guideline.