This conversation reveals that meeting budget targets is a significant component of the motivation systems for both of these managers. They obsess about the budgets. Adam spends too much time focusing on budgets, to the detriment of other activities. The budgets for both are used to measure their performance, but only in a negative way. There appears to be little in the way of motivation system for the two should they actually make budget. If there are rewards, they seem unaware of them, but they are acutely aware of the consequences of missing budgets. Both have noted that they are punished for events that are beyond their control -- the budget targets are inflexible and do not take into account unusual events, let alone changes in the business environment.
5. a) A properly functioning standard costing system should yield many advantages to managers such as Adam and Ali. These include giving the managers the ability to focus on managing rather than costs; they provide benchmarks thereby encourage employees to excel; they simplify the bookkeeping function; and they enhance organizational accountability (Accounting for Management, 2009).
The managers at HK are currently focused intently on cost control not only because they need to meet their budgets but because even if they are meeting their budgets if they are not meeting their sales targets they will be required to reduce their costs accordingly. This creates an environment in which cost control takes precedence over all other activities. Standard costing would free managers from the need to obsess about costs, allowing them to focus their energies on more productive activities.
If the standards are reasonable, employees are more likely to work towards meeting them. At present, employees at HK have no such motivation; they only see standards that are arbitrary, probably unreasonable, and without any reward if they are met. The bookkeeping function is also simplified. Standard costs not only reduce the time spent on bookkeeping, but they allow for more effective cost allocation as well.
A good standard costing system should be easily integrated into a total accounting system. With costs standardized, they can be properly apportioned throughout the organization. At present, departments fight over cost allocations, but a shift to a stronger standard costing system would allow departments to debate responsibility during the budgeting process, rather than quibble over dollars.
5b. To increase employee motivation, employees at HK should be asked to focus on their higher order motivators. These include esteem and achievement. At present, they are motivated by fear, which applies more to lower order needs. Benchmarking appeals to achievement needs and flows directly from a properly-designed standard costing system. Standard costing frees employees from the constraints of focusing on micromanaging costs and encourages them to analyze cost-reward relationships in their endeavors. A greater degree of risk-taking is thereby encouraged.
Standard costing also results in more realistic targets being set. The current system fails in this regard because the entire budget is based on arbitrary targets. If costs are set in a standard manner, the entire budgeting process becomes more bottom-up. This leaves employees with objectives that are more realistic, and therefore more likely to be respected by the employees. Employees in general are not averse to achievement, but will be averse to pursuing goals that they are feel are unrealistic, come with no reward, and are not based on proper business sense. Standard costing allows managers to strip away these attitudes and place the emphasis of performance on realistic benchmarks as set by other competitors in the industry.
HK's current budgeting process fails because it is arbitrary, divisive, punitive and does not support organizational objectives. A new process should be brought into place that strips away the incentive to micromanage costs and refocuses management and employees on achievable benchmarks, complete with positive motivators. The new process should also incorporate improved communication and a holistic approach that encourages managers to work together to solve problems rather than compete against one another for scarce resources, as the current system does.
Marginson, D. & Ogden, S. (2005). Budgeting and innovation. Financial Management. Retrieved December 10, 2009 from http://www.cimaglobal.com/cps/rde/xbcr/SID-0AAAC544-372CB746/live/TechnicalApr05.pdf
Hope, J. & Fraser, R. (2003). Who needs budgets? Harvard Business Review.
No author. (2009). Advantages and disadvantages of standard costing. Accounting for Management. Retrieved December 10, 2009 from http://www.accountingformanagement.com/advantages_disadvantages_standard_costing.htm