Table of Contents

QUESTION ONE...............................................................................................................2

(a) Harmonization of Accounting Standards...........................................................2

(b) International financial analysis (Honey Badger Plc)......................................5

Simplified balance sheet.....................................................................................................................................5
Working capital, working capital need, and net cash.........................................................................................5
Common-size income statements for the financial years 2020–2023................................................................6
Profitability ratios...............................................................................................................................................7

QUESTION TWO..............................................................................................................9

(a) Optimum product mix..............................................................................................9

Accounting approach..........................................................................................................................................9
Qualitative factors............................................................................................................................................11

(b) Budgeting.........................................................................................................................11
Prepare Alpha Ltd’s monthly cash budgets......................................................................................................11
Other factors.................................................................................................................................................... 13

(c) Beyond Budgeting........................................................................................................14

Works Cited...........................................................................................................................18
QUESTION ONE
(a) Harmonization of Accounting Standards

With the growing trend of business internationalization and the integration of

financial markets, the need for harmonized accounting rules has become
more pronounced. Global corporations often operate through subsidiaries
across various countries, raising capital for diverse investment opportunities
and expanding their business worldwide. The existence of distinct accounting
standards in different countries complicates financial reporting, as
companies must reconcile varied principles to create their financial
statements. Adopting a unified set of standards enables companies to
communicate a common financial reporting language, offering investors and
auditors a cohesive and transparent view of financial performance.

Among the three main regulatory systems (Hajnal, 2017) governing

accounting standards, the IAB/IFRS, which represents a single set of high-
quality, comprehensible, and enforceable accounting standards, is becoming
the predominant global language for financial reporting, adopted widely by
both developed and developing nations. Currently, more than 140
jurisdictions have adopted the IFRS according to the official website of IFRS;
however, that does not include some of the most major economies in the
world – the US and Japan. Some other major economies such as the UK and
China have had their own GAAP, but their GAAPs are closely aligned with the
IFRS, or converting efforts are visible.

Unlike GAAP, which is a “rule-based” system, IFRS follows a "principles-

based" approach, which ensures clarity and adaptability, making it easier to
understand and apply. As the definitions suggest, GAAP prescribes specific
requirements for each accounting items, while IFRS provides broad
guidelines, which leaves rooms for the subjective judgment of the
accountants. The principle-based system allows countries to flexibly adopt
and adjust based on its legal, economic, and cultural environments, while
being consistent enough to promote worldwide harmonization. One example
illustrating the difference between the US GAAP and IFRS is the valuation of
property, plant, and equipment (PPE). IFRS values fixed assets under either
cost of revaluation. Revaluation reflects the fair value of the asset at filing
date more fully, but may fluctuate based on the market. IFRS gives
companies the option to revalue their assets so that they are more relevant
to the decision-making process by reflecting current fair value. Meanwhile,
U.S. GAAP does not permit revaluation and fixed assets are strictly valued at
cost (McGladrey, 2012 cited in Lam, 2015).

The convergence to IFRS benefits not only investors but also a wide range of
stakeholders. Firstly, it benefits global investors who seek timely and
comparable information across jurisdictions to better gauge cross-border
investment opportunities. Without a unified standard, investors incur
additional costs in terms of time and effort to convert financial statements.
Investor confidence is bolstered when globally accepted standards are used
(Hajnal, 2017). The globalization of accounting standards also benefits
international credit grantors, such as the World Bank (Lam, 2015), by
decreasing the difficulties of comparing financial statements.

Convergence with IFRS also benefits preparers. Accountants save time and
effort as they no longer need to learn the accounting standards of multiple
countries where a company operates. Companies no longer need to prepare
separate financial statements to meet the statutes of different states,
reducing their compliance burden. Unifying the accounting standards
worldwide also allows the accounting professionals to market their expertise
in different parts of the world (Bhatia, 2014).

Regulators also benefit, as the complexity associated with understanding

diverse reporting regimes is reduced. For governments, harmonization
simplifies tax authorities’ work and eases compliance for large public entities
(Nobes & Parker, 2012). The harmonization of accounting practices is
especially meaningful to emerging and developing economies which rely on
foreign investments, as it reduces investors’ effort in comparing the entities
across borders, hence boosts their confidence. To these countries, foreign
capital helps facilitates efficient capital markets, increases capital formation,
and promotes economic growth (Bhatia, 2014). SMEs operating in emerging
economies have a better chance to gain access to overseas capital funds.

While the comparability of financial statements is a significant advantage for

investor understanding, achieving complete uniformity in accounting
standards comes with considerable challenges and costs. Although the vision
of achieving absolute harmonization in accounting practice is alluring, the
process of convergence will incur huge costs regarding staff training and loss
of productivity. To the preparers’ side, companies converting to IFRS will be
required to overhaul internal information systems, revise procedures, and
adjust existing practices. Investors and other users of financial statements
also need to understand the new methods of calculation, while accounting
professionals must update their skills and modify their procedures. SMEs, in
particular, face challenges due to limited financial resources and a lack of
professional expertise to navigate the transition. At the jurisdiction level,
converting to the IFRS means substantial initial investments, including
reviewing and amending relevant laws and regulations, particularly in areas
like financial statement formats, presentation standards, and taxation
ambiguities arising post-convergence.

While the benefits of convergence to IFRS to many countries especially those

in the developing sphere is clear, the benefits don’t seem that clear for many
others. For the less developed countries, the adoption of IFRS has the
potential to enhance the quality of financial reporting standards and attract
foreign capital funds. However, in the case of the United States, where
financial reporting quality and enforcement are already high, the benefits of
adopting IFRS are less compelling (Lin, Riccardi, & Wang, 2013). In fact,
some investors fear that the overall quality of financial statements might
decline, as competition among multiple accounting standards often drives
improvements in quality. Furthermore, U.S. stakeholders worry about
reduced representation in the global standard-setting process, potentially
leading to standards that cater to international needs but fail to address
domestic priorities.

Complete harmonization of financial statements, even under IFRS, remains

elusive. The principles-based nature of IFRS, while offering flexibility, allows
room for interpretation, which can lead to variations in application. This
flexibility, while advantageous in some respects, may also increase the risk
of earnings manipulation for managerial benefit. For example, under the
IFRS, companies are allowed to apply their revaluation model, hence the
reporting of impairment loss, or any gain or loss from revaluation, or when to
record the gain/loss still depends on the subjective decision of the company
management. Additionally, IFRS employs fair value accounting as a
measurement basis, which reflects the current market value of assets and
liabilities. However, fair value assessments can vary significantly depending
on the valuation methods used by different market participants, leading to
discrepancies in financial statements.

Up to now, 140 countries have either fully or partly converted to the IFRS,
including important economies such as the EU (2005), Australia, Canada
(2011), APAC and Latin America. The jurisdictions currently not fully adopting
IFRS including the US, several SEA jurisdictions (Singapore, Indonesia,
Thailand, Vietnam, Philippines), and several Middle-East and African
jurisdictions. However, the Asian and African countries are making efforts to
align as much as possible with the IFRS, while there is weak signs that the US
will be converting in any way to the IFRS. An alternative discussion is having
the IFRS aligning with the US GAAP, not in a way to make them identical, but

In conclusion, globally accepted accounting standards applied consistently is

desirable. However, a full transition to international standards is impossible.
In the meantime, the FASB and IASB should prioritize enhancing the quality
of their standards while striving to prevent new discrepancies in areas where
IFRS and US GAAP have already converged (PwC US National Office, 2024).
(b) International financial analysis (Honey Badger Plc)

Simplified balance sheet

Amounts (USD) Structure (%)

December 31 (In millions of 2022 2021 2022 2021
$)
Fixed Assets 17,1 15,2
69.99% 68.01%
49 46
Current Assets 5,0 5,2
20.44% 23.36%
07 37
Cash 2,3 1,9
9.57% 8.63%
45 34
Total Assets 24,501 22,417 100.00 100.00
% %
Current Liabilities 7,341 8,429 29.96% 37.60%
Long-Term Liabilities 5,360 2,622 21.88% 11.70%
Equity 11,800 11,366 48.16% 50.70%
Total Equity and Liabilities 24,501 22,417 100.00 100.00
% %

Working capital, working capital need, and net cash

December 31 (In millions of $) 2022 2021

Equity and Financial Liabilities 17,160 13,988
Fixed Assets 17,149 15,246
Working Capital 11 (1,258
)
Current Assets (minus Cash) 5,007 5,237
Current Liabilities 7,341 8,429
Working Capital Need (2,334) (3,192
)
 Cash and Equivalents 2,345 1,934
Bank Overdrafts - -
Net Cash = Working Capital less Working 2,345 1,934
Capital Need

Due to lack of information or no mention of bank overdrafts in the balance

sheet, bank overdrafts is assumed to carry a zero value. “Other liabilities”
are classified as long-term liabilities, as current liabilities already account for
accounts payable, accrued expenses, loan and notes payable, current
maturities of long-term debt, and accrued tax expenses. The working capital
increased from minus $1,258 in 2021 to $11 in 2022, showing a good sign.
The increase in WC is reflected by an increase in long-term debt together
with an increase in PPE, suggesting that the company was expanding in
terms of physical presence during the 2021-2022 period through debt
financing. The simplified Balance Sheet also suggests an increase in the
proportion of long-term liabilities against current liabilities.

Working capital need shows an improvement due to a reduction in loans and

notes payable. Overall, the financial structure would be a little risky due to
negative working capital. However, the cash position is sufficient to pay off
obligations in the case of late collection of receivables or other reverse
situations. The financial structure is hence not that risky, but the company is
suggested to manage its working capital more efficiently.

Common-size income statements for the financial years 2020–2023

Consolidated income statements

Year ended December 2023 2022 2021 2020 202 202 202 202
31 (in millions of $) 3 2 1 0
Net operating 21,0 19,5 17,5 17,3 100 100 100 100
revenues 44 64 45 54 % % % %
Cost of goods sold 7,762 7,105 6,044 6,204 37% 36% 34% 36%
Gross profit 13,2 12,4 11,5 11,1 63% 64% 66% 64%
82 59 01 50
Selling, general and 7,488 7,001 6,149 6,016 36% 36% 35% 35%
administrative
expenses
Operating income 5,79 5,45 5,35 5,13 28% 28% 31% 30%
4 8 2 4
Interest income 176 209 325 345 1% 1% 2% 2%
Interest expense 178 199 289 447 1% 1% 2% 3%
Equity income (loss) 406 384 152 (289) 2% 2% 1% -2%
Other income (loss)— (138) (353) 39 99 -1% -2% 0% 1%
net
Gains on issuances of 8 91 0% 1%
stock by equity
investee 0% 0%
Income before 6,06 5,49 5,67 4,84 29% 28% 32% 28%
income taxes 8 9 0 2
Income taxes 1,148 1,523 1,691 1,222 5% 8% 10% 7%
Net income 4,92 3,97 3,97 3,62 23% 20% 23% 21%
0 6 9 0

Profitability ratios

Profitability 202 202 Calculations

Ratios 2 1
ROE 34% 35% Net Income/Shareowners'
Equity
ROCE 23% 28% Net Income/(Total Assets -
Total Current Liabilities)
Gross profit rate 64% 66% Gross Profit/Sales
Return on sales 28% 31% Operating Income/Sales
Asset turnover 80% 78% Net Sales / Total Assets
ROA 16% 18% Net Income/Total Assets
Sales per employee $1.86 $1.59 Sales/Number of Employees

*Net Income does not include other operating charges and cumulative effect
of accounting changes. There are zero operating charges for the years 2021
and 2022. Meanwhile, there is cumulative effect of accounting change for
SFAS No. 142 regarding goodwill and other intangible assets in 2022, and No.
133 regarding derivative instruments and hedging activities in 2021. There is
also equity investees profit/loss recorded for the year of 2022, which is also
excluded from the calculations of profitability, as it involves non-operating
investments and does not indicate the profitability or efficiency of the core
business.

In 2022 Honey Badger Plc is holding a decent amount of cash (Cash/Total

Assets is 9.57% in 2022). It may have also experienced a physical expansion
in 2022 due to an increase in PPE. Despite that, the ratios show that
profitability declined in 2022 compared to 2021 as ROE, ROCE, ROA all
declined. It means that the ability of the company to generate sales from
each dollar of capital and assets was weaker in 2022 compared to the
preceding year, or the new investments had not yet been realized into
profitability. The high Cash/Total Asset ratio also suggests that the company
was leaving too much idle cash without re-investing to generate more
profits.

If we look at common-size income statements for the years 2020-2023, it

looks like that the company had phenomenal operations on 2021 than the
other years with Return on sales (Operating income margin) at 31%
(compared to 30% in 2020, 28% in 2022 and 2023) and Net margin is 23%
(compared to 21% in 2020, 20% in 2022 and 23% in 2023) despite a high tax
percentage. The soft beverage industry may have suffered from supply
chain distort in 2022, leading to lower gross margin; and other income, the
details of which are not specified here, also suffered, leading to lower net
margin. Other major same-industry companies also experienced lower
performance in 2022.

ROEs are around 34-35%, lower than the soft beverage powerhouses such as
Coca-Cola and PepsiCo. Profit margins are around the same level as Coca-
Cola and higher than PepsiCo (source: MacroTrends). Sales per employee
increased in 2022; as the number of employees was reduced from 11,047 in
2021 to 10,506 in 2022 and continue to shrink to 10,241 in 2023, reflecting
downsizing and labor cost-cutting trend all over the world. With fewer labor,
the company managed to have decent business results in 2023 with a Net
margin of 23% (similar to 2021’s), but mostly due to a lower tax percentage
in 2023, which is 5% compared to 8% in 2022 and 10% in 2021. It is
observed that the company started downsizing since 2020, whether or not
owed to COVID-19 pandemic. The size of the global operations has
decreased by 10% (10,241 in 2023 employees against 11,408 employees in
2020), but it did not significantly affect the efficiency of the company as
COGS percentage and SG&A percentage only increased by a small margin,
and Sales per employee has increased significantly.

QUESTION TWO
(a) Optimum product mix

Accounting approach

Based on the provision of the limitations in the supply of raw materials A and
B and the maximal sales demand, we calculate the profitability rank of the
products as follows. Accordingly, Mam is the most profitable product, hence
ranked 1, which is followed by Lam and Nam respectively.
 Lam Mam Nam
Contribution per unit sold 15 12 18
Litre of Material A per unit 2 1 4
Litre of Material B per unit 5 3 7
Estimated sales demand 102 160 110
Total litres of Materials required 714 640 1210
Contribution per litre 2.14 3.00 1.59
Rank 2 1 3

Based on the profitability rank, we maximize the production of Mam, then

Lam, and assign the leftover to Nam. After reaching the maximal capacity for
Mam and Lam, the remaining Material A is sufficient to produce 167 units of
Nam and Material B is sufficient to produce 33 units of Nam. Therefore, the
number of Nam products is 33.
Product Quantity
Priority 1 - Mam Quantity 160
Material A left 870
Material B left 740

Priority 2 - Lam Quantity 102

Material A left 666
Material B left 230

Priority 3 - Nam Quantity

Material A enough for (units) 167
Material B enough for (units) 33

If we use Excel Solver, we can produce the same numbers. to find out that
optimal number of units for Lam, Mam and Nam will be 102, 160, and 33
respectively, and the estimated profit using the optimal product mix will be
£4,025. Products Lam and Mam will reach maximal capacity (102 and 160),
while Product Nam, which consumes significantly more materials to produce
relative to its dollar contribution per unit, will be manufactured at capacity.

Ma Na Tota Constraints or
Lam m m l Calculations Conditions

Materials Material
required per A 2 1 4
unit
Material
B 5 3 7
Maximum sales demand
(units) 102 160 110

Contribution per unit sold 15 12 18

Cannot exceed
Optimal sales maximal sales
(units) 102 160 33 demand
*=Quantity of
A used per
Material A unit * optimal Total cannot
used 204 160 131 495 units exceed 1,030
*=Quantity of
B used per
Material B 1,22 unit * optimal Total cannot
used 510 480 230 0 units exceed 1,220
*=Contributio
n per unit sold
1,53 1,92 4,02 * optimal Total must be
Profits 0 0 575 5 units optimal

Qualitative factors

The accounting approach contains a few limitations. All the calculations are
based on assumptions, and assumptions can be inaccurate or oversimplified.
The assumptions of profit contributions likely have not taken into account
the intangible factors such as the branding potential or strategic potential.
Product Nam is the least prioritized in terms of production; however, it
generates the highest profit contribution per unit and it may be a star
product for the company. According to the BCG matrix, a star product
indicates a product that requires high capital expenditure but potentially
generates high return in the future. Star products require intense boost to
help the company maintain their position. For example, image Castromac is
a material manufacturing company and Product Nam is a newly developed
material using state-of-the-art technology that is exclusively owned by
Castromac. It may be expensive to produce, the company needs to push
Nam to gain market share.

Another factor to consider is customer preference. Nam may be the most

recognized product of Castromac. Nam’s production (33 units) is about only
one-fourth of total sales demand, so assume that Castromac may run out of
Nam at the end of Q1. For the rest of 2025, other competitors may take the
chance to win the market segment. Some other factors include the business
conditions such as demand trends. For example, imagine Castromac is a
beverage company where Nam is a zero-percentage beer while Lam and
Mam are alcoholic beverages. In the past, alcoholic beverages sold more
than non-alcoholic beverages but the latter is slowly emerging recently but
the trend is not yet clear. Such trend should also be taken into account when
considering Nam’s production.
(b) Budgeting

Prepare Alpha Ltd’s monthly cash budgets

Changes commend
October Novembe December January February
r *
Receipts
Receivables 750,000 0 960,000 960,000 960,000
Total receipts 750,000 0 960,000
960,000 960,000

Payments
Variable cost - Raw 225,000 225,000 225,000 225,000 225,000
materials
Other material cost 150,000 150,000 150,000 150,000 150,000
Fixed cost 225,000 225,000 225,000 225,000 225,000
Total payments 600,000 600,000 600,000
600,000 600,000

Borrowings (net) 300,000 (300,000

)

Net surplus/cash 150,000 (325,00 360,000

0) 360,000 60,000
Opening balance 175,000 325,000 25,000
385,000 745,000
Net cash 325,000 25,000 385,000
745,000 805,000

Workings:
Workings Current Future Total

Quantity 750,000 Increase by 60% 450,000 1,200,000

Price Decrease by 20% 960,000
(240,000)
Cost - -
Variable cost - 30% of sales revenue
Raw materials
Contribution 50% of sales revenue
Other variable 20% of sales revenue
cost
Fixed cost 300,000 -
Less depreciation (75,000) -
Total 225,000

OVC = SP - M - C 1 – 50p – 30p = 20p

*Comment: Since the cash flows in the month prior to the commencement
date of the new production (1st of December) will be affected, November
would suffer negative cash if trade receivable is zero. Therefore, the
company would have to resort to borrowing £300,000 for three months with
a minimal interest. The amount will be paid in full in February.

Other factors

Although Alpha’s main product and the business environment are not
specified, it is recommended that the company management take into
account other factors such as the the manufacturing capacity as production
is set to increase by 60% together with the labor needed for the change in
production. The company has to take into account the customers’ response
when price is slashed by 20%, the competition during the next six months
(e.g., whether a competitor will also introduce a price discount), hence the
feasibility that a price cut will actually lead to higher sales volume. For
Alpha’s since the cash flows will be affected in November prior to the
commencement date, it looks like that the company may not have enough
cash to cover for the operations in December, leading to further action to
obtain capital in short term, for example, borrowing £300,000 in the terms of
three months. If the cost of capital is low (for example, the company can
borrow from a close individual with minimal interest), the borrowing is
justified. If the cost of capital is high, e.g., which involves borrowing from an
external credit grantor, an interest expense will be incurred.

Since the variable costs are assumed to remain unaffected by the change in
product, it is recommended that the company consider best-case and worst-
case scenarios. The worst-case scenario is when the cost of raw materials
actually accounts for 30p of sales revenue instead of remaining the same per
the base scenario. It is specified in the requirement that Alpha manufactures
the same product, which justifies that the cost of raw materials may increase
together with the change in production quality. It is also assumed that the
company requires no further improvements on the production facility despite
60% increase in production level, otherwise it indicates that the factories
usually function at about 60% below capacity. As said above, new costs
incurred related to the change in production level also need to be accounted
for, such as labor and overhead cost. Last but not least, given that the
company may have to be reliant on a loan to fund their new operation, that
makes the new operation a risky one.
(c) Beyond Budgeting

Budgeting is one of the most important techniques in managerial accounting;

it is a valuable tool used in the management process to achieve strategic
goals. Nowadays, most organizations rely on a budgeting system to create
plans and make decisions (Reka, Stefan, & Daniel, 2014). Many scholars call
budgeting one of the most successful corporate tools (Reka, Stefan, &
Daniel, 2014). Meanwhile, as the traditional budgeting system has
demonstrated weaknesses when it was exposed to turbulent economic
environments such as the financial crisis in 2008 and even long before that,
many have questioned the validity of such tool and proposed more flexible,
participative and well-rounded alternative options.

Traditional budgeting is a financial planning approach that involves creating

a quantitative representation of a proposed management plan for a specific
period (Horngren, Datar, & Rajan, 2012). One common method within
traditional budgeting is incremental budgeting, which involves adjusting the
previous year’s figures to accommodate current needs. The key advantages
of traditional budgeting fall under three main categories: planning, control,
and performance management. By providing quantitative insights into future
cash flows, budgeting plays a crucial role in corporate planning (Horngren,
Datar, & Rajan, 2012). Control management, which aims to stabilize
operations within the framework of established organizational objectives
(Otley, 1999). Budgeting is also used in performance management, when
managers, for example, are assigned with KPIs based on the forecast and
rewarded or punished accordingly (Lorain, Domonte, & Pelaez, 2015). In the
examples above, the information generated from the budgeting model is
used to derive important corporate decisions, but it is only useful when the
information is reliable and immune to volatile macroeconomic conditions.
The history has proven that the projections of future income that are derived
when markets are stable will become over-optimistic, hence inaccurate,
when the economy suddenly enters a turbulent period and demands become
less predictable. That would question the initial motive of the quantitative
budgeting system

The traditional budgeting method has been heavily criticized mostly in three
broad categories namely: time, process, and people. The literature has
evidenced that the traditional budgeting method is a time-consuming, hence
costly, process. The budgeting model could take months to complete (Hope
& Fraser, 2003), and managers generally spent a considerable amount of
time to derive plans and budgets besides their core tasks. Hope and Fraser
(2003) also pointed out that the traditional budgeting method follows a top-
down approach, which means the budget is created by senior management
and passed down to business units with limited participation by the lower
managerial levels. Such an approach makes it difficult for organizations to be
agile and responsive to fast market changes, as the budgets are “fixed” at
the beginning of a period and also entail a set of KPIs and a reward system
that would take time to modify in case of economic decline. Scholars have
also argued that since the budgeting process features a lot of guesswork
(Reka, Stefan, & Daniel, 2014), for example, the ability of customers to pay
on time, the actual demand for a specific product, etc., it is unreliable and
needs abolishing altogether. The traditional budgeting method also lays the
brickwork for performance management. Based on the budgets, managers
are granted KPIs with corresponding rewards or penalties. Inaccurate
forecast may lead to unrealistic goals, which dismay managers or leads them
to committing unethical behavior to achieve such goals.

The traditional budgeting approach has been heavily criticized by scholars

(Pietrzak, 2013; Reka, Stefan, & Daniel, 2014) and at the same time,
businesses have done every way to either reform their budgeting practice or
abandon budgeting altogether. Some of the most common improvements
are adopting participative budgeting, adding more revision intervals, while
some abandoned annual budgeting and moved forward to more flexible
mechanisms such as activity-based budgeting (ABB), rolling forecasts,
balanced scorecards, or an overall makeover with Beyond Budgeting.

Beyond Budgeting is a flexible budgeting framework that attracts academic

attention. The center of beyond budgeting is to address what is lacking
about the traditional budgeting approach, which is rigidity, top-down, and
lack of participation granted to the lower managerial levels. The Beyond
Budgeting movement was first proposed by Hope and Fraser (2003). Beyond
Budgeting is a 12-principle framework that provides the guide for companies
to reduce budgeting efforts and make organizations more agile (Hope &
Fraser, 2003), focusing on employee empowerment, customer satisfaction,
relative targets, and team performance (Hope & Fraser, 2003). For example,
in performance management, managers will not be evaluated based on a
fixed budget targets but organizations can focus on creating adaptive and
more relative assessment tools such as benchmarking with the industry
averages, comparison with competitors in addition to prior periods,
competition between internal units, etc. (Hope & Fraser, 2003). By setting
flexible KPIs, managers will not fixate their behavior towards a fixed goal but
continuously find a way to outdo themselves, outperform the industry or
their colleagues. Beyond Budgeting is, rather than a specific method, a set of
principles that incorporates all the improvements needed in traditional
budgeting, with some of the alternative tools such as the ABB, balanced
scorecards, and rolling forecasts being the most commonly used and
effective tools.

The Beyond Budgeting framework is theoretically superior to the traditional

budgeting method in two main pillars. First, Beyond Budgeting gives way to
more flexible practices as the targets are reviewed more regularly and goals
are tied to more dynamic comparison benchmarks rather than only the prior
periods. In Beyond Budgeting, the reward system is more dynamic as it is
not designed based on a rigid set of quantitative figures (e.g., managers will
be rewarded X dollars for completing the target of Y units sold). Beyond
Budgeting is set to incorporate both financial (e.g., sales), and non-financial
metrics (e.g., customer satisfaction score, defect rate, etc.). Second, Beyond
Budgeting enables decentralized leadership, as the decision-making process
is made to involve more lower-leveled employees, thus granting them higher
autonomy and a stronger sense of responsibility.
Beyond Budgeting is ideal to maintain an organization’s agility, albeit at a
cost that not every organization can afford. Beyond Budgeting is not suitable
for all organizations, especially with SMEs with limited resources (Nguyen,
Weigel, & Hiebl, 2018). Beyond Budgeting organizations do not simply
implement BB tools and call it BB adoption; instead, it encompasses
fundamental changes such as transforming the leadership style, revamping
the management control systems (MCS), abolishing old practices, making
new hires, or training existing staffs on new routines. Lidia (2014) pointed
out that the drawbacks of traditional budgeting varied between organizations
and were usually overstated. Therefore, despite BB’s positive acclaims in the
face of harsh criticisms towards traditional budgeting, the latter remains the
dominant practice to this day. Empirically research has shown that most
companies seem to have no plans to abandon budgeting altogether (Nguyen,
Weigel, & Hiebl, 2018) despite being aware of its drawbacks. According to
statistics by Goode and Malik (2011) and Pietrzak (2013), the majority of
organizations regardless of its country origin are loyal to traditional
budgeting and they are dedicated to improving its budgeting practice rather
than shifting to Beyond Budgeting. Libby and Lindsay (2010, cited in Nguyen
et al., 2018) conducted a survey on Canadian and US managers working in
large organizations and found that traditional budgeting remained the
preferable method among 80% respondents.

The most common reasons for such resistance cited by the managers in
these studies are fear of change, lack of management basis without
quantitative budgets, high cost of conversion, or the difficulty locating the
right benchmarks (Nguyen, Weigel, & Hiebl, 2018). If we revisit the main
critic points targeting traditional budgeting, it can be seen that beyond
budgeting may fall into the same loopholes if implemented poorly. Beyond
budgeting also involves a lot of benchmark settings, such as comparison with
the industry, and comparison with other units. It also employs promoting
non-financial metrics such as customer satisfaction rating, defect rate, etc.,
but these metrics also contain inaccuracies, or not indicating a manager’s
competency. The choices for metrics also reflect each company’s managerial
philosophy, which varies between company leaders, and it’s may as well
contain errors.

Economic crises, such as the 2008 financial downturn, exposed the

limitations of traditional budgeting systems and spurred companies to adopt
more flexible approaches like Beyond Budgeting. While these methods
enhance agility and decision-making, they also present challenges in terms
of implementation complexity and cultural change. As the business
environment remains volatile, the shift toward flexible budgeting practices is
likely to become a permanent feature of financial management. It is
expected that companies will either improve traditional budgeting, or
adopted some Beyond Budgeting tools such as rolling forecasts. In the
future, other technological integrations such as AI and machine learning may
add efficiency and flexibility to budgeting.

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