Ratcheting is a budgeting practice that occurs when organizations make managers
ID: 2571254 • Letter: R
Question
Ratcheting is a budgeting practice that occurs when organizations make managers budget targets harder to achieve in the following year if their current year's actual performance is good and easier to achieve in the following year if their current years actual performance is good. In other words, organizations interpret good,performance as a signal that managers can achieve higher performance and respond by making managers budget targets more difficult. Given the definition what is one possible negative consequence of ratcheting?A. For managers who are evaluated based on their performance relative to their budget target, ratcheting reduces their motivation to achieve high performance.
B. ratcheting makes targets to difficult in general
C. Ratcheting encourages earnings management to increase earning relative to the budget target.
D. A and c Ratcheting is a budgeting practice that occurs when organizations make managers budget targets harder to achieve in the following year if their current year's actual performance is good and easier to achieve in the following year if their current years actual performance is good. In other words, organizations interpret good,performance as a signal that managers can achieve higher performance and respond by making managers budget targets more difficult. Given the definition what is one possible negative consequence of ratcheting?
A. For managers who are evaluated based on their performance relative to their budget target, ratcheting reduces their motivation to achieve high performance.
B. ratcheting makes targets to difficult in general
C. Ratcheting encourages earnings management to increase earning relative to the budget target.
D. A and c
A. For managers who are evaluated based on their performance relative to their budget target, ratcheting reduces their motivation to achieve high performance.
B. ratcheting makes targets to difficult in general
C. Ratcheting encourages earnings management to increase earning relative to the budget target.
D. A and c
Explanation / Answer
The answer is option “d” – both ‘a’ and ‘c’.
For managers who are evaluated based on their performance relative to their budget target, ratcheting reduces their motivation to achieve high performance. This is because when you do better than target, your next target is even higher, but when you do worse; your target won’t be reduced. This reduces the motivation to achieve high performance and beat the targets given.
Ratcheting encourages earnings management to increase earning relative to the budget target. The management has a clear motivation to get aggressive and increase their earnings to the maximum possible limit by exceeding the budgeted targets.
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