Behavioural Budgeting at Ashcombe Services
Ashcombe Services prepares its annual budget by taking last year's actual costs and adding 5%. Department heads submit their own figures, which the finance director then trims by 10% across the board before presenting to the board. Last year, the IT department requested $400,000 for a project, was cut to $360,000, and still delivered the project for $330,000. This year the IT head has requested $470,000 for a similar project. The sales director consistently submits low targets, which he beats by 15-20% each year, and is praised for 'reliable forecasting.' Production managers complain that budget cuts force them to defer maintenance, and two have left citing 'impossible targets.' The board wants a budget that 'stretches but is achievable.'
1. Identify the behavioural problems in Ashcombe's budgeting process and explain the likely consequences of the current approach.
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The process exhibits classic budgetary slack and dysfunctional behaviour:
- Incremental 'last year +5%' ignores activity changes and embeds past inefficiencies - it is not a zero-based or activity-based approach.
- Top-down 10% trim teaches managers to inflate requests. The IT head's request rose from $400k to $470k after being cut to $360k and still delivering at $330k - clear evidence of padding in anticipation of the cut. The 10% cut is arbitrary and rewards over-bidding.
- Sales director's low targets create slack; beating them by 15-20% and being praised for 'reliable forecasting' rewards sandbagging, and the board gets a distorted view of achievable performance.
- Deferred maintenance and resignations show the budget is perceived as imposed and unfair, damaging motivation, trust and retention - consistent with Hopwood's budget-constrained style and low budget commitment.
Consequences: distorted resource allocation, eroded trust between finance and operations, under-investment in assets, and loss of experienced staff. The process measures negotiation skill, not operational reality.
2. Recommend a revised budgeting approach that would produce a genuinely stretching but achievable budget, addressing participation and slack.
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Move to participative, zero-based/activity-based budgeting with negotiation:
- Build budgets from activity drivers (volumes, service levels) rather than last year +5%, so padding has no anchor.
- Use bottom-up submission followed by structured challenge - a budget committee reviews each line against activity and benchmark data, rather than a blanket 10% trim. Blanket cuts punish honest managers and reward inflators equally.
- Introduce rolling forecasts so targets can be revised as conditions change, reducing the incentive to build slack into an annual fixed number.
- For sales, set targets using external benchmarks and trend analysis, and reward accuracy of forecast as well as achievement - praise for beating a low target by 20% should be reframed as a forecasting failure.
- Adopt a stretch but achievable philosophy explicitly: targets set at a level achievable ~80-90% of the time, with a separate stretch tier for exceptional bonus.
- Protect maintenance and training as ring-fenced committed spend so short-term cuts cannot defer essential activity.
Caveat: participation takes time and can still produce slack if managers control information; combine participation with independent challenge and benchmarking to keep the budget honest.
3. The board asks whether a 'top-down imposed budget' would be simpler and avoid slack. Assess this proposal.
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Top-down budgeting does remove the opportunity for managers to build slack, is faster and aligns with strategic priorities. But it risks:
- Low commitment and demotivation - managers who had no input may resist or disengage, as already seen with resignations.
- Information disadvantage - senior management lacks operational detail, so imposed targets may be unrealistic (the current 10% trim already shows this).
- Gaming - without participation, managers may withhold information or find other ways to protect themselves.
Given Ashcombe's existing trust problems and evidence of unachievable targets, a purely imposed budget would likely worsen morale. A hybrid is preferable: strategic targets and cost envelopes set top-down, with departmental detail negotiated bottom-up and independently challenged. This captures the anti-slack benefit while retaining commitment.