You are the senior management accountant at Johnno's Sportsworld Co. (JSC), a retailer of sporting equipment, and the CEO asks for your advice regarding some concerns he has with the firm's current-year financial performance. He notes that many of the firm's stores are falling a long way short of their targets, and the managers of those stores are not contributing any ideas for how their performance can be improved. The stores' budget targets are set each year at 'last year's profit plus a 5% stretch target'. Several of the managers have expressed the view that this method of target setting does not take into account current market conditions, but the CEO says that this is the 'fairest method' for setting the budgets.
Required:
a. Describe JSC's current budget process in terms of the concept of 'participative budgeting'.
b. Advise the CEO on how the current budget process may be leading to the performance problems being experienced at JSC, and on what changes you would recommend.