Types of Conflicts In Budgeting

Company v/s The Division
1. NPV v/s profit Issue
  1. 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
    1. 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
      1. Give company managers some share options so that they will also try to improve the share holder wealth
    2. some companies perform capital budgeting before accepting the project and also impose the accounting targets as well
2. Dilution of the divisional performance
  1. managers rejects some projects which may dilute the Divisonal performance ,even though the project is favourable in overall basis
    1. 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
Division v/s Division
1. Divisions may compete for limited financial resources during the time of the budgeting
  1. Prioritisation (e.g. using zero based budgeting
  2. Negotiations & compromise
Short-Termism
1. Managers cut R&D to hit short term targets but erode long term competences.
  1. Use more nonfinancial indicators that focus on key long term issues such as quality, productivity, etc.
    1. Thus allow incentives and bonuses based on non financial indicators
2. Managers reject projects that are “slow starters” even though they have positive NPV.
  1. Link bonuses to longer time periods.
Individualism
1. The risk of budgetary slack. This is when managers participate in target setting and, as a result, make the budget too easy to achieve.
  1. Possibility of budgetary slack

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Types of Conflicts In Budgeting

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