Critical Analysis Of The Abolition Of Budgeting

1968 Words Nov 18th, 2014 8 Pages
Critical Analysis of the Abolition of Budgeting

Budgeting is a main instrument of management control for most organizations’ systems. Recently it is a controversial phenomenon, the disappointment with budgeting is occurring. This is because some people find that budgeting processes are time consuming and often lead to dysfunctional behavior. Additionally, they make organization fail to be flexible in such an uncertain financial environment. Many people think traditional budgeting systems should be abolished, but others wish to improve them. Hope and Fraser (2003b) provide a few examples of European companies that have abolished traditional budgeting systems successfully. On the other hand, Eckholm and Wallin (2000) observe approximately 61% of firms will improve the budgeting processes and continue to use them as control purpose. This paper argues that whether budgeting should be abolished or not mainly focus on three aspects, “fixed performance contracts”, time consuming and the changes of budgeting in the real life. Evidence is presented that as a control instrument although budgeting has some shortcomings, it should not be abolished. Instead, those shortcomings could be addressed by some improvement measures.

Fixed performance contracts
One criticism of Hope and Fraser is that budgets use a mechanism called fixed performance contracts. They contend that when budget related elements have changed during budgeting period, a fixed goal may stand a poor performance…
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