Behavioral Effects of Budgeting. Ecourse Steel Corporation is a medium-size company in the steel industry with six divisions located in different geographical sectors of the United States. Considerable autonomy in operational management is permitted in the divisions, partly due to the products produced and the markets served. Corporate management establishes divisional budgets using prior year data. Budgets are prepared by year and then divided by four to establish a quar- terly plan, with top management attempting to recognize problems unique to each division. Once the year's divisional budgets are set by corporate management, they cannot be modified by division management. The budget for calendar year 1999 projects total corporate net income before taxes of $6,600,000, including $1,650,000 for the first quarter. Results of first quar- ter operations presented to corporate management in early April showed corporate net income of $1,475,000. The Gary Division operated at 4.5 percent above its projected divisional net income, while the other five divisions showed net incomes with variances ranging from 1.5 to 22 percent below budgeted net income. Corporate management is concerned with the first quarter results because it believed strongly that differences among divisions had been recognized. An entire day in late November of last year was spent presenting and explaining the corpo- rate and division budgets to the division managers and their division controllers. A mid-April meeting of corporate and division management has generated unusual candor. All five division managers with net income below plan cited reasons why first quarter results in their respective divisions represented effective management and were the best that could be expected. Corporate management has remained unconvinced and informs division managers, "Results will be brought into line with the budget by the end of the second quarter!"

Required: 

1. Identify and explain the major disadvantages in the procedures apparently employed by Ecourse Steel's corporate management in preparing and implementing divisional budgets. 

2. Discuss the behavioral problems that may arise by requiring Ecourse Steel's "division managers to meet the quarterly budgeted net income figures, as well as the annual budgeted net income.