PROBLEM 8–25 Behavioral Aspects of Budgeting [LO1]
Five years ago, Jack Cadence left his position at a large company to start Advanced Technologies Co. (ATC), a software design company. ATC’s first product was a unique software package that seam- lessly integrates networked PCs. Robust sales of this initial product permitted the company to begin development of other software products and to hire additional personnel. The staff at ATC quickly grew from three people working out of Cadence’s basement to over 70 individuals working in leased spaces at an industrial park. Continued growth led Cadence to hire seasoned marketing, distribution, and production managers and an experienced accountant, Bill Cross.
Recently, Cadence decided that the company had become too large to run on an informal basis and that a formalized planning and control program centered around a budget was necessary. Cadence asked the accountant, Bill Cross, to work with him in developing the initial budget for ATC. Cadence forecasted sales revenues based on his projections for both the market growth for the initial software and successful completion of new products. Cross used this data to construct the master budget for the company, which he then broke down into departmental budgets. Cadence and
Cross met a number of times over a three-week period to hammer out the details of the budgets.
When Cadence and Cross were satisfied with their work, the various departmental budgets were distributed to the department managers with a cover letter explaining ATC’s new budget- ing system. The letter requested everyone’s assistance in working together to achieve the budget objectives.
Several of the department managers were displeased with how the budgeting process was undertaken. In discussing the situation among themselves, they felt that some of the budget projec- tions were overly optimistic and not realistically attainable.
1. How does the budgeting process Cadence and Cross used at ATC differ from recommended practice?
2. What are the behavioral implications of the way Cadence and Cross went about preparing the master budget?