Increasing the pools of indirect costs is not a guarantee for improving the service or product accuracy costs. If there is homogeneity in the current cost pool, increasing the cost pool number increases no accuracy (Horngren et al., 2002). Nonetheless, if there is no homogeneity in the current cost pool, the level of accuracy increases under the condition that when the cost pools that have their homogeneity increased vis -à- vis the cost pool that is single.
The incentives management has to misrepresent these estimates.
There is always the incentive for the managers to either overestimate revenues related to budgets or underestimate their expenses deliberately so as to fulfill the company’s budgetary goals. This incentive is always created because of the compensation they get often on their level of performance with reference to achieving the targets of the budget. This condition is called the budgetary slack (Van der Stede, 2000). Moreover, it occurs because of the uncertainty concerning expected future results. This prompts the managers to be conservative when establishing the budget under such situations and likely for a new product line.
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Nonetheless, it occurs when the company introduces participative budgeting as the process comprises of a great number of staffs who participate. Hence, the budgetary slack is an incentive introduced in the budget. Another reason is that the management desire to report about the company’s ability in beating budget expectations though it would not likely happen as outsourced analyst would judge the performance of the company regarding its results and that of the competitors, but not in relation to the budget.
Controls/procedures that may be put in place to prevent misrepresentation of these estimates.
The misrepresentation of the budgetary estimates is controlled by a certain number of very qualified and aggressive managers are accepted into the process of playing a bigger part in the budget model because they can place expectations that are extremely high (Conboy, 2010). Moreover, budgetary slacks are controlled when there is no connection between budget and bonus plans or performance.
References
Conboy, K. (2010). Project failure en masse: a study of loose budgetary control in ISD projects. European Journal of Information Systems, 19(3), 273-287.
Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T. (2002). Management and cost accounting . Harlow: Financial Times/Prentice Hall.
Van der Stede, W. A. (2000). The relationship between two consequences of budgetary controls: budgetary slack creation and managerial short-term orientation. Accounting, Organizations and Society, 25(6), 609-622.
