Continuous budgeting HON Company is the largest maker of mid-priced office furniture in the United States and Canada. Its management has expressed dissatisfaction with its annual budget system. Fierce competition requires businesses to be flexible and innovative. Unfortunately, building the effects of innovation into an annual budget is difficult because actions and outcomes often are evolutionary. Innovation unfolds as the year progresses. Consequently, HON’s management team reached the conclusion that “when production processes undergo continuous change, standards developed annually for static conditions no longer offer meaningful targets for gauging their success.”
Required
Assume that you are HON Company’s budget director. Write a memo to the management team explaining how the practice of continuous budgeting could overcome the shortcomings of an annual budget process. (For insight, read the article “Continuous Budgeting at the HON Company,” Management Accounting, January 1996. This article describes HON’s real-world experience with a continuous budget system.)