Types of Conflicts In Budgeting

Types of Conflicts In Budgeting

1. Company v/s The Division

   • NPV v/s profit Issue
     • The company wishes to increase the shareholder wealth in long term so they look forward for increasing the NPV .But divisions are assessed based on making profits in the shorterm
       • Thus Divisions are set short term targets where share holder wealth maximization is done through meeting long term targets .ie making a positive NPV from long term investments
         • Give company managers some share options so that they will also try to improve the share holder wealth
       • some companies perform capital budgeting before accepting the project and also impose the accounting targets as well
   • Dilution of the divisional performance
     • managers rejects some projects which may dilute the Divisonal performance ,even though the project is favourable in overall basis
       • Use performance measures such as relevant costing and residual income to accept the projects which may be favourable for the company target as a whole

2. Division v/s Division

   • Divisions may compete for limited financial resources during the time of the budgeting
     • Prioritisation (e.g. using zero based budgeting
     • Negotiations & compromise

3. Short-Termism

   • Managers cut R&D to hit short term targets but erode long term competences.
     • Use more nonfinancial indicators that focus on key long term issues such as quality, productivity, etc.
       • Thus allow incentives and bonuses based on non financial indicators
   • Managers reject projects that are “slow starters” even though they have positive NPV.
     • Link bonuses to longer time periods.

4. Individualism

   • The risk of budgetary slack. This is when managers participate in target setting and, as a result, make the budget too easy to achieve.
     • Possibility of budgetary slack