er AccountingTools, the budget:

• Allows for gaming the system
  • manager can deliberately increase expense estimates to make budget to achieve bonuses
  • which is unethical behavior

1.  Managers have no input to their budgets; OIS sets them. And they are just the expenditures required to fund the activities their departments need to support the current forecast. And they are variable budgets as they change whenever the firm’s forecast changes, providing them with the expenditures required to support their new activity demands

• Encourages use it or lose it behavior
  • If a department’s expenditures are headed to being under its budget, what are the manager’s options?
    • come in under budget and risk a cut next year = best for company
    • spend to be sure you don’t get a cut next year = best for manager

See (1) above. It eliminates the risk described. Also, coming under budget could compromise the firm’s profit objective. See (2) below

• rigid decision-making
  • with no mechanism for revisions to budget, decision making becomes increasingly rigid
  • also, managers still think they can spend the budget, rupturing profit budgeted

 OIS is constantly being revised to keep it current. See (1) above

• Allows blame for outcomes
  • If a department didn’t make its budget, blame the departments upon which the manager depends for goods and services to do his job

2. Unlikely to happen. Since all the departments supporting the specific department are properly funded, there are only two explanations: the department’s activities are wrong or the manager is delinquent. Both of which can be addressed promptly.

• Is always wrong
  • when budget is created YE, it’s based on pretty good predictions
  • inevitably, predictions get increasingly “dicey”
  • and budget become increasingly irrelevant

OIS is current and thus the current forecast is; as such, it is very difficult for it to be irrelevant. See (1) above.c

• Can be very time/cost consuming to complete
  • depends on size of company; 2-3 months for larger companies for which OIS is the most appealing
  • longer if the budget is tied to performance metrics, approval processes, and extensive forecasting,
  • even longer if budget is aligned with fixed, annual plans

There is no annual budgeting process with OIS.