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A law firm uses budgeting for planning and control. The managing partner estimates the demand for the year for each of the firm's four divisions:
A law firm uses budgeting for planning and control. The managing partner estimates the demand for the year for each of the firm's four divisions: Civil, Criminal, Corporate and Property. A separate partner is responsible for each division. Each divisional partner then prepares a cost budget based on the managing partner's demand estimate for the divisions. These budgets are then submitted to the managing partner for his approval. He typically amends them as he thinks appropriate before issuing each divisional partner with the final budget for the division. It is not his practice to discuss these amendments with the respective divisional partners. Actual performance is then measured against the final budgets for each month and each divisional partner's performance is appraised by asking the divisional partner to explain the reasons for any variances that occur. The divisional partner of the Corporate division has been asked to explain why her staff costs exceeded the budgeted costs for last month while the chargeable time was less than budgeted. Her reply is below: "My own original estimate of staff costs was higher than the final budgeted costs shown on my divisional performance report. In my own cost budget I allowed for time to be spent developing new services for the firm's corporate clients and improving the clients' access to their own case files. This would improve the quality of our services to clients, and therefore, should increase client satisfaction. The trouble with our present system is that it focuses on financial performance and ignores the other performance indicators found in modern performance management systems." Required (i) Discuss the present budgeting system and its likely effect on divisional partners' motivation. (ii) Consider the relevance of non-financial indicators in this scenario
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