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Chapter 6: Problem 4

'Budgeted performance is a better criterion than past performance for judging managers." Do you agree? Explain.

Short Answer

Expert verified
In conclusion, both budgeted performance and past performance have their advantages and disadvantages when judging managers. Budgeted performance provides clear, quantifiable financial goals but may not reflect a manager's overall effectiveness. Past performance offers a comprehensive view of a manager's capabilities, though it can be subjective and may not predict future success. It is recommended to use a combination of both budgeted and past performance metrics, along with other qualitative factors, for a well-rounded assessment of managers.

Step by step solution

01

Define Budgeted Performance and Past Performance

Budgeted performance refers to a manager's ability to achieve pre-determined financial targets, such as sales and expenses, within a specific period. It is an important factor to evaluate how well a manager is performing in terms of meeting the company's financial goals. On the other hand, past performance focuses on how a manager has performed previously, which may include aspects of financial performance but also includes other factors such as communication, decision-making, and problem-solving skills.
02

Advantages of Budgeted Performance

Budgeted performance has a few key advantages when used as a criterion for judging managers. Firstly, it provides a clear, quantifiable goal that is tied to the company's financial objectives, making it easier to evaluate success. Secondly, it forces managers to plan and develop strategies to achieve these targets. This helps to promote efficiency and accountability within the organization.
03

Disadvantages of Budgeted Performance

One major disadvantage of budgeted performance is that it may not always accurately reflect a manager's overall effectiveness. For instance, a manager's performance might be affected by external factors beyond their control, such as market fluctuations or even unforeseeable circumstances (like a global pandemic). Additionally, relying solely on budgeted performance can lead to short-term thinking and potentially overlook other important aspects of management, such as employee morale, engagement, and the development of innovative ideas.
04

Advantages of Past Performance

Past performance provides a more comprehensive view of a manager's capabilities as it includes factors beyond financial measures. Evaluating past performance enables organizations to consider both quantitative and qualitative aspects of a manager's work, such as their ability to lead and mentor their team, their decision-making abilities, and the quality of the relationships they've built with their employees, peers, and external stakeholders.
05

Disadvantages of Past Performance

A significant drawback of past performance is that it can be subject to bias and interpretation, making it difficult to fairly compare managers or establish objective standards for evaluation. Additionally, past performance may not accurately predict future success, as managers may change or improve over time or face new challenges that require different skills.
06

Conclusion

In conclusion, both budgeted performance and past performance have their advantages and disadvantages when judging managers. Budgeted performance is generally more quantifiable and focused on the financial goals of the company but may not fully capture a manager's overall effectiveness. Past performance provides a broader perspective on a manager's abilities, but it can be more subjective and prone to bias. Rather than relying on one criterion over another, it may be more effective to evaluate managers by using a combination of both budgeted and past performance metrics, along with other qualitative factors, to ensure a fair and comprehensive assessment.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Managerial Evaluation
Evaluating managers is a crucial part of running any organization. It ensures that they are efficient and aligned with the company's goals. However, choosing the right criteria for this evaluation can be challenging.
Budgeted and past performance are both common methods used, but each comes with its own merits and challenges.
  • Budgeted Performance: This focuses on achieving specific financial targets within a set period. It helps in setting clear goals and measuring success in terms of numbers.
  • Past Performance: This takes a comprehensive view by considering not just financial results, but also a manager's leadership qualities, decision-making skills, and team dynamics.

Combining insights from both criteria, along with qualitative inputs like team feedback, offers a more balanced evaluation.
Past Performance
Past performance is invaluable in assessing a manager's historical effectiveness across various domains. It offers a lens into how a manager has dealt with opportunities and challenges over time.
Understanding past performance can include:
  • Financial Accomplishments: Achieving or surpassing previous financial goals.
  • Interpersonal Skills: Building and maintaining strong relationships with team members and stakeholders.
  • Adaptability: Demonstrating capability in handling changes or unexpected challenges.

While past performance provides rich insights, it's important to note that it may not be a reliable predictor of future success since situations and roles evolve.
Financial Targets
Financial targets serve as clear and measurable goals set for managers within an organization. These targets help keep a focus on key financial achievements that drive business success.
Setting financial targets effectively can shape managerial behavior and strategies by:
  • Encouraging resource optimization to hit sales and profit goals.
  • Motivating managers through performance-linked incentives.
  • Providing direction and clarity on organizational priorities.

While essential, focusing solely on financial targets can sometimes overlook vital areas like innovation, team motivation, and long-term sustainability.
Performance Metrics
Metrics for assessing performance are essential tools in managing and improving efficiency within organizations. Different types of metrics provide varied insights that can assist in a balanced managerial evaluation.
Key categories of performance metrics include:
  • Quantitative Metrics: These are based on numeric indicators such as revenue growth, cost reduction, and return on investment.
  • Qualitative Metrics: These involve subjective assessments of skills such as leadership effectiveness, teamwork, and strategic thinking.

Employing a mix of these metrics allows for a more rounded and fair evaluation by recognizing achievements beyond just the financial figures.

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Most popular questions from this chapter

Sales and production budget. The Coby Company expects sales in 2018 of 201,000 units of serving trays. Coby's beginning inventory for 2018 is 13,000 trays, and its target ending inventory is 29,000 trays. Compute the number of trays budgeted for production in 2018 .

Master budget. Which of the following statements is correct regarding the components of the master budget? a. The cash budget is used to create the capital budget. b. Operating budgets are used to create cash budgets. c. The manufacturing overhead budget is used to create the production budget. d. The cost of goods sold budget is used to create the selling and administrative expense budget.

"The sales forecast is the cornerstone for budgeting." Why?

Responsibility in a restaurant. Paula Beane owns a restaurant franchise that is part of a chain of "southern homestyle" restaurants. One of the chain's popular breakfast items is biscuits and gravy. Central Warehouse makes and freezes the biscuit dough, which it then sells to the franchise stores where it is thawed and baked in the individual stores by the cook. Each franchise also has a purchasing agent who orders the biscuits (and other items) based on expected demand. In March 2018 , one of the freezers in Central Warehouse breaks down and biscuit production is reduced by \(25 \%\) for 3 days. During those 3 days, Paula's franchise runs out of biscuits but demand does not slow down. Paula's franchise cook, Betty Baker, sends one of the kitchen helpers to the local grocery store to buy refrigerated ready-to-bake biscuits. Although the customers are kept happy, the refrigerated biscuits cost Paula's franchise three times the cost of the Central Warehouse frozen biscuits, and the franchise loses money on this item for those 3 days. Paula is angry with the purchasing agent for not ordering enough biscuits to avoid running out of stock and with Betty for spending too much money on the replacement biscuits. Who is responsible for the cost of the biscuits? At what level is the cost controllable? Do you agree that Paula should be angry with the purchasing agent? With Betty? Why or why not?

"Production managers and marketing managers are like oil and water. They just don't mix." How can a budget assist in reducing conflicts between these two areas?
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