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Question 1
A. The budget refers to the plan according to which we spend our money to maximize the returns. It serves as a yardstick for measuring our performance. It is critical to the smooth functioning of the business as it predicts the requirements of money in our business. The budget has a deep impact on human behavior. It can motivate them to work hard and outperform the budget or it may limit their potential by creating a constraint. Therefore budget can act as a stimulus or as a hindrance.
There are the following advantages of budgeting:
· Performance evaluation: The performance of employees can be evaluated using budgets. They may receive a bonus and other incentives when they outperform the budgets.
· Proper planning: When we create budgets it helps us in creating a plan for the future. When there is a major deviation between the budgets and actual results the plan needs to be made realistic.
· Boosting staff morale: When the employees know what is expected of them they tend to act more efficiently. Moreover, when the bonus is linked with budgets it motivates the employees to work harder.
· Optimum resource utilization: Budgets help in the proper utilization of resources. A roadmap is created which enables the managers to make a proper allocation of resources.
· Monitoring and control: The budget helps us in monitoring and controlling our performance. We monitor our performance in line with the budget when actual performance falls short we take corrective actions to improve our performance and bring it in line with the budget.
However, there are certain disadvantages to budgeting:
· Rigidity: A budget creates the right pathways and there is very little room for deviation. Sometimes things happen which are beyond the control of anyone there is no room in budgets for adjusting those things. For example, no one expected that a virus would disrupt the working of the entire world. People will be forced into lockdown. Economic activities would be hampered. Budgets don't have room for these kinds of adjustments which makes them inflexible.
· Inaccurate: A budget is created in the main office which is far from the conditions where main production activities take place. It uses many restrictive assumptions which makes the budget inaccurate at times.
· Costly and time taking: Creating a budget requires time and money. Analysts are hired to forecast and create a budget. A lot of time is spent on this process which sometimes yields little or no benefit in comparison to its costs.
· Quantitative approach: Budgets only consider quantitative data like profitability but other important qualitative data like customer satisfaction or the employee's working conditions are not given any importance. This hinders the long-term growth of the company.
· Spend it or lose it: When a budget is created each department is allotted the maximum amount of money that it can spend and the amount which remains after spending is taken by the head office. The department managers, therefore, spend the entire money as they know that if they don't spend the money they will lose it. Thus the company loses because of this behavior on part of the managers.
Thus we can say that a budget is at times a friend or a foe of the managers as it has many advantages and disadvantages. But the advantages outweigh the disadvantages and make budgets a very useful tool for the business.
B. Return on Investment (ROI) is used to measure the performance of the division and such ROI can also be used to award the bonus to the management based on the performance of such division. ROI is used as a management control device for the evaluation of the performance of managers and is used in decentralized companies. But there are also few limitations which do not allow the management to use as a control system for the same. For the reward of the managers based on the division performance will lead to the personal interest of the managers and which may vary from the organizational goals.
(i) Following are two examples by which a manager can improve the ROI of the division:-
· There might be a difference between the organizational objectives and the objectives of the division which may lead the company in two different paths....