Melco Management Accounting Research
Discussion Paper Series
No.MDP2016-001
Budgetary management due to business environment changes: A case study on the mechanism of resource reallocation at a Japanese company

March 2016
Hiroshi Adachi
Faculty of Management and Information System,
Prefectural University of Hiroshima
1-1-71, Ujina-Higashi,
Minami-ku, Hiroshima,734-8558, JAPAN
Email: adachi@pu-hiroshima.ac.jp
Kosuma Shinohara*
Faculty of Commerce, Fukuoka University
8-19-1 Nanakuma,
Jonan-ku, Fukuoka,
814-0180, JAPAN
Email: shinohara@fukuoka-u.ac.jp*Corresponding author

The Melco Foundation
Nagoya, Japan
Discussion Paper Series of the Melco Management Accounting Research, in order to promote
the study of management accounting, has published this unfinished paper onto the Web. Pleaseobtain the permission of the author when citing this paper.

Budgetary management due to business environment changes:
A case study on the mechanism of resource reallocation at aJapanese company

Hiroshi Adachi
Faculty of Management and Information System,
Prefectural University of Hiroshima
1-1-71, Ujina-Higashi,
Minami-ku, Hiroshima 734-8558, JAPAN
Email: adachi@pu-hiroshima.ac.jp

Kosuma Shinohara*
Faculty of Commerce, Fukuoka University
8-19-1 Nanakuma,
Jonan-ku, Fukuoka 814-0180, JAPAN
Email: shinohara@fukuoka-u.ac.jp*Corresponding author
Abstract
Preceding studies have examined processes to cope with changes to the businessenvironment so that it may attain its originally set company-wide targets. Using a casestudy of a Japanese company, this paper examines resource reallocation between
departments in the process of coping with such environment changes. We show animportant mechanism used to support resource reallocation, namely, the grooming ofmulti-skilled workers in the lifetime employment system, which is adopted in many
Japanese companies. The company does not change its original budgetary targets
depending on the circumstances at hand; rather, it uses the loosely coupled relationshipbetween its initial budgetary targets and action plans to attain the former through feedforward changing actions.
Key words
Budgetary management, target management, resource allocation, multi-skilled worker,
beyond budgeting
1. Introduction
This paper explores how businesses conduct resource reallocation between

1departments in the process of coping with environment-related changes. To this end, we
use a case study of a Japanese company. In recent years, the relationship between
budgetary management and environment changes has been actively discussed among
researchers and practitioners. Budgeting is said to be a monetary representation ofaction plans that are devised to achieve profit targets for a given period (Anthony, 1989).
Therefore, the budgeting process involves making action plans. Provided the gaps
between the assumptions made while drawing up the budget and reality are small, they
can be filled in by corrective actions, which are identified through budget varianceanalysis. However, when these gaps grow large, the action plans devised at the planningstage will not function as intended. In such situations, it is widely believed thatmanagers cannot cope with the environment changes to the business because they are
restricted to the budget allocation-based action plans. Accordingly, a proposition called“beyond budgeting” has been devised; it concerns abandoning the original budget
because of the negative effects arising from the original plans and resource allocation(Bunce et al., 1995; Hope and Fraser, 2000, 2003; Bogsnes, 2008).
On the other hand, such cases cannot be generalized. Simons (1987)
pointed out that the budget management process consists not only of “programmed
control,” which requires the members of an organization to act upon a decided plan, butalso “interactive control,” which necessitates coping with changes by obtaining
information about the environment during that period. In other words, the problem to beresolved using beyond budgeting can be regarded as a problem of budgeting operation
rather than that of budgeting itself. Therefore, this paper focuses on understanding themechanism of budgetary management to enhance an organization’s reaction toenvironment changes during such periods. Using a case study, the remainder of thispaper presents a mechanism of operating budgetary management while viewing the totalorganizational environment, including the employment practice. In this regard, our casestudy refers to a Japanese textile manufacturer. The company adheres to the lifetime
employment system, as do most Japanese companies. We show that this particular
employment practice, which is unique to Japan, contributes in a novel way to budgetary
management in times of stress.
Our results indicate the following. First, the company in our case study
does not change its original budgetary targets depending on the situation; rather, it uses2the loosely coupled relationship between its initial budgetary targets and action plans toattain the former through feed-forward changing actions. Second, it copes with shortterm environment changes using a management control package that consists ofbudgetary management and personnel evaluation. Third, the company’s sales programs
and production plans at the factory level are modified in line with changes to demandduring the budgeted period. The company aims to meet its initial budgetary targets byrebuilding daily or monthly labor arrangement/reallocation plans.
This paper is structured as follows. The next section reviews the existing
literature on how budgetary management can be used to cope with changes in thebusiness environment. The third section explains the research methodology andprovides a summary of the investigation. The fourth and fifth sections describe thecompany that serves as the case study. The sixth section discusses the research question.
Finally, the last section concludes and suggests avenues for future research.

2. Literature review
As described earlier, under the budgetary system, the budget is formulated
as a monetary action plan that will help the organization attain its annual profit target.
Organizational activities are controlled in line with the management’s budget during thebudgeted period. Budgetary variance is interpreted as an “exceptional phenomenon,”and its causes are analyzed so that appropriate corrective actions may be taken.
Nonetheless, the business environment does not always follow the premiseof the original budget. To overcome possible issues when risks become reality, certain
mechanisms may be used to cope with the environment changes, such as forecastingrisks at the beginning of budgetary period and preparing multiple budgets in advance.
On the other hand, some studies suggest dispensing with the preparation of multiple
budgets beforehand and suggest that the management’s standard of the budgetedamount may be varied after the fact as the situation demands. Typically, organizations
resort to a variable budget system. Under this system, when the actual operating rate
loss equals the standard rate loss in the original budget, the allowable budgetary amountis reset according to the actual number after analyzing the budgetary variance, and the
new/future efficiency is measured and evaluated on the basis of this allowable amount(Welsch, 1964).

3

Nevertheless even if multiple budgets are prepared, there is no guaranteethat one will hit the mark. Likewise, the variable budget system only considers changes
in capacity utilization. Therefore, setting a risk-ready budget at the beginning of thebudget period is not guaranteed to work. Instead, another system has been suggested;
the budget may be revised after an uncertainty or risk comes to light, and then, it
becomes easier to respond to the possibility of the identified risk becoming reality. A
typical example is the rolling budgeting system, where the budget is reset once a month(not once a year). After each month, the next month’s budget is formulated for a monthexceeding the period of the original budget (Hansen and Van der Stede, 2004).
In addition, without rolling budgeting, it is possible to cope withenvironment changes to the business, by revising the original budget periodically inresponse to the situation. Simons (1987) showed that the budget revising practice inJohnson & Johnson made it possible to cope with high business environment
uncertainty because the company’s budgetary management process included not only
“programmed control” but also “interactive control.” He suggested that the budgetary
management process went beyond “programmed control,” an aspect of budgetary
management used to motivate managers to execute predetermined management
activities. In the case of Johnson & Johnson, the managers and top executives discussed
the contents of the budgetary revisions. Executives could share the necessary
information, which reduced their uncertainties while decision making. Simons (1987)
called this process “interactive control,” as the discussion process allowed information
sharing.
Conversely, such an approach is not always adopted in budgetary
management practice. This point has been acknowledged as a problem in Beyond
Budgeting, which is advocated by some practitioners (Hope and Fraser, 2000, 2003).
According to Hope and Fraser, the budget is a premise of an action plan set at the
beginning of the period, but this premise can change significantly during the said period
owing to uncertainty. The budgetary management process, however, sometimes stifles
innovation “by rigid adherence to fixed plans and resource allocations agreed to twelve
to eighteen months earlier” (Hope and Fraser, 2003: 8). In that case, according to Hopeand Fraser, it can be difficult to motivate managers to attain original budgetary targets
on the basis of “fixed performance contracts,” which link budgetary attainment with4

their performance evaluations. They suggested that there is a need to abolish thebudgeting system and evaluate managers relatively by comparing their current andprevious performance using key performance indicators (KPIs) or against theircompetitors’ performance, which they call “relative improvement contracts.” Some
researchers agree with beyond budgeting (Bogsnes, 2008; Bourmistrov and Kaarbøe,
2013). Østergren and Stensaker (2011), for example, referred to the increase offlexibility to cope with environment changes for the attainment of KPI targets bydecoupling performance evaluation from budgetary targets and adopting relative
improvement contracts. In addition, as a case of increased flexibility, Henttu-Aho andJärvinen (2012) referred to a practice where the next action to be taken is discussed
through regular rolling forecasts during the period, so as to attain the targets set at the
beginning of the period, without completely abolishing the budgeting system. They
called this practice the “beyond budgeting approach.”
It should, however, be cautioned that resource allocation in budgetary
management practice is not necessarily as rigid as that questioned in beyond budgeting.
As Simons (1987) showed, there are suggestions to follow a budgeting process wherein
the annual budget can be revised and reset in line with the conditions prevailing at the
moment, recognizing that an initially unexpected situation can occur during the period(Hansen et al., 2003).1 In addition, a recent survey of budgetary management practices
shows that many companies revise their original budgets during the budgeted period(Ekholm and Wallin, 2000; Libby and Lindsay, 2010).
As Otley (1980: 422) mentioned, management accounting information
systems “act as a package and must be assessed jointly.” Thus, it may be possible tocombine the budgetary system and other management systems successfully to allow
flexible actioning to cope with environment changes to the business during the said
period. Some suggested, for instance, that it is possible to cope with changes via rolling
forecasts, which would not require changing the budgetary targets during the period. Insuch a case, the rolling forecasts of some KPIs are carried out regularly during thebudgeted period (Ekholm and Wallin, 2000; Henttu-Aho and Järvinen, 2012; Lorain,
1

Conversely, some of the literature pointed out that organizational flexibility can be supported against
uncertainty by purposely allowing some budgetary slack (Merchant and Manzoni, 1989). We, however,
do not discuss how the slack included in budgetary target numbers affects the capacity to adapt toenvironment changes, because this paper focuses on the discussion of mechanisms supporting theattainment of budgetary targets set at the beginning of the budgeted period.

5

2010). Then, action plans are accordingly added or revised as feed-forward control(Nishimura 2003).
Resources internal to the company need to be reallocated if the action plansof departments are revised. It was suggested that the reallocation process can be carriedout by devising multiple control levers (Simons, 1995) in the budgetary and othermanagement systems. Frow et al. (2010) showed a case wherein managers had to attainbudgetary targets but were allowed to reallocate resources between departments basedon mutual adjustment, thus allowing the resetting of budgets and action plans. They
analyzed this case using Simons’ (1995) framework, which included four levers ofcontrol. In this case, managers had to attain the original budgetary targets under the
belief and boundary system (Simons, 1995). Therefore, when the business environment
did not change significantly during the budgeted period, the diagnostic system, which
was centered on budgetary control, functioned as intended. On the other hand, under the
belief and boundary system, managers had to contribute to the attainment of corporate
strategic targets different than the original budgetary targets. Thus, they were expected
to correspond in an agile fashion, which included recognizing environment changes,
adjusting to them by resource reallocation, and ultimately attaining corporate targets.
Frow et al. positioned adjustment between managers, supported by this system, as aninteractive system (Simons, 1995). In addition, to secure its successful functioning,
performance evaluation was linked to the degree of attainment of strategic targets, notto departmental budgetary targets.
As mentioned above, researchers have referred not only to approaches toprepare for risks forecasted preliminarily, but also to react quickly to changes to thebusiness environment by revising budgets and action plans during the budgeted period.
Most of these studies have examined the “package” (Otley, 1980) of the budgetarysystem and other management systems, and have shown some mechanisms that enable
the business to cope with environment changes during the budgeted period owing to theorganic linkage of these systems. Notably, in Frow et al.’s (2010) case, managers were
empowered to revise budgets and action plans, and put in charge of resource
reallocations/ adjustments as needed. They coped with business environment
uncertainty in an agile manner through such adjustment processes.
On the other hand, Frow et al. (2010) hardly discussed how resources could6be reallocated quickly. How do managers, who are urged to adjust vertically andhorizontally, reallocate resources? This paper aims to partly clarify such mechanisms,
then focuses on the resource reallocation process, and analyzes how it is enabled using acase study on budgetary management practice in a Japanese company. The case study
helps us to present some of the mechanisms that help the company to adapt to businessenvironment changes by revising its budget.
Further, our analysis focuses on the belief that “the study of theeffectiveness of management accounting information systems is intimately bound up
with the study of all of the many kinds of control mechanisms used by organizations”(Otley, 1980: 422). Specfically, our case study shows that under Japan’s unique lifetime
employment system, the personnel evaluation system is intimately bound with thebudgetary system (Abegglen, 1958), which enhances managers’ flexibility to cope withbusiness environmental change.

3. Research design
3.1 Research method
The analysis in this paper is based on a field study conducted in a single
firm, a Japanese general textile manufacturer called Seiren Co. Ltd. (hereafter, “Seiren”).
In field study research, the main task of the researcher is to inquire into the practices ofthe business and analyze his or her observations by moving back and forth between thedata and theory (Ahrens & Chapman, 2006). The case study method is generally
adequate to deal with the questions “how” or “why” (Yin, 1994), namely, how or why abudgeting system allows flexible responses to business environment changes.
We conducted in-depth longitudinal field research. The research data werecollected from July 2007 to August 2012. We carried out 36.5 hours of semi-structured
interviews and factory observations, and participated in an open seminar conducted by
the managing director. We also had e-mail access to confirm our understanding of theobservations or ask explicit questions. In addition, we carefully investigated bothinternal and external documents to ensure the objectivity of the data obtained from theinterviews.
We chose this particular organization as our case study because while
Seiren uses the general budgeting system, it has been coping with many environment-7related changes to the business. Therefore, there appear to be contradictions between
Seiren’s budgeting practice and the budgeting literature. Examining this case will thus
help us improve our understanding of budgeting practice.

3.2 The organization
Seiren is a general textile manufacturer in Japan, which comprehensively
handles many textile-based processes, from reeling to sewing and sales. The term
“general” means that the company conducts all manufacturing processes, from making
yarn to final product sales, and they also handle many other products related to textile
manufacturing, such as natural fiber, synthetic fiber, car parts, electronic components,and medical devices.
Seiren’s sales amounted to 103 billion yen for the fiscal year ending March
31st, 2015. Seiren employs 5802 people. As shown in Figure 1, Seiren adopts divisionalorganization for each product. Each “division” takes the form of a functionalorganization and houses an “accounts unit/department” as its sub-organization. In theorganizational hierarchy, the sales department and factory fall under the category of“accounts unit/department.”

8

Figure 1 Seiren’s Organization

Note: Seiren (2007b: 3)
4. Management by objectives system and training multi-skilled workers
Seiren has constructed a budgetary and personnel evaluation systemcentered on the management by objectives system (MBOS). This section gives anoutline of its personnel evaluation system under MBOS, focusing on the case of afactory. Next, we describe the company’s budgetary management process.

4.1 Annual planning and its input to developing departmental plans
In Seiren’s MBOS, the corporate annual plan is used to develop the
departmental plans, and their objectives are linked to personnel/manager evaluations.
We explain this development process below.
In mid-January, the corporate planning department directs the divisions anddepartments to design mid-term and annual plans based on the exchange rates and crude
prices.2 Then, each department makes its own mid-term and annual plans based on the2

Seiren’s fiscal year starts in April and ends in March in the next year.

9most recent business environment. Their designs are coordinated horizontally andvertically within their division, and then they are deliberated upon in a company-wide
management meeting held in the middle of March. If there are no issues, the plans areapproved in the beginning of May by the board of directors along with the company’s
accounts statement for the last period.
Based on the corporate planning department’s policy of “saving energy andcost to the extent possible,” a section of the plan is devoted to improvements in leadtime, margin percentages, and quality, as well as various cost reductions throughmanufacturing system improvements.
[Annual section plan of a factory]-

Security policy: no disaster or fire-

Improve production management revolutionary:➢

Shorten lead time from xx days to xx days➢

Improve margin percentage: improve factory profit ratio from xx% to xx%➢

Improve quality: improve percentage of defective products from xx% toxx%-Save material costs: xx thousand yen-

Save dyeing cost: xx thousand yen-

Save controllable cost: save outsourcing and inspection costs by acquiring storage spaceon the company’s premises…

Note: Seiren(2007a)

In response to such a plan, each division and department makes a profit andloss budget. For a factory or sales department, for example, the most important indicatorof annual targets is the profit target.3 To attain this profit target, the department studies
the annual plan of the whole company and its preconditions, as noted by the corporate
planning department (e.g., exchange rates and crude prices). Then, each factory andsales department, namely, the smallest settlement unit, sets its budget. The so-devised
profit and loss budget is developed into a budget for each month.
Also, each section of the annual plan is modified twice a year. While thefactories and sales departments make an annual plan for the whole year at the beginning
3

In Seiren, as discussed later, because factory outputs are sold through the company’s sales department
and other companies, the factory is treated as a profit center.

10

of the budgeted period, a modified plan is presented just before the start of the last halfof the year. This modified plan considers the estimated performance of the first half ofthe year and considers the most recent business environment.

4.2 Setting personnel objectives and personnel evaluation at the factory level
Once KPIs are determined for a division or department, they are imposed
upon the relevant manager as his responsibility to attain and are utilized for personnel
evaluation at the end of budgeted period. These targets are developed for all hierarchiesof employees after a company-wide management meeting approves the annual plans of
all units in mid-March. Specifically, after a superior explains his policy to his
subordinates, each of them fills in his “Target Management Plan” (TMP). Then, they
have personal meetings about the targets and TMP designs with their superiors, andthese designs are coordinated.
The success and difficulty in achieving these objectives are reflected inpersonnel evaluations in the form of bonus appraisals and performance reviews
alongside “job responsibility,” 4 “attendance,” and other relevant elements. Bonus
appraisal is conducted twice in a fiscal year. The attainment of objectives in the MBOS
has very strong links to the appraisal. Here, we have to be mindful of the fact thatattainment of objective goals in quantitative terms alone does not form part of theappraisal; attainment of subjective goals, such as “job responsibility,” are also
considered during the appraisal.
Like the MBOS referred to in the general literature (Drucker, 1954), to
ensure transparency and fairness, the appraisals are conducted as meetings, where asuperior and a subordinate discuss these issues until both are convinced. In addition,
when the appraisal is settled, superiors consult each other on the appraisals of theirsubordinates in order to ensure fairness.
Performance review is conducted once a fiscal year, where pay raises,
evaluation of skills, promotions, and so on are appraised based on some evaluation
items. The appraisal form is evaluated (including the last three ratings based on theattainment of objectives and grades of ability (from grades 1 to 8)). The self4“Job responsibility” indicates evaluating how an individual performs his/her role in the company andconforms as an employee of Seiren by following the company’s directions, manuals, and moral code, andpreventing accidents (Seiren 2007a: 14).

11

certification form, which includes career plans (such as acquiring new qualifications
and/or studying abroad, and requests for transfer) is also evaluated.
Managers’ personnel evaluations are divided roughly equally on attainmentof KPIs (such as factory profit target) as per the annual section plan.5 The other half ofthe evaluation focuses on the mid-range agenda, implementation status in terms of selfdevelopment, work attitude, and so on, most of which are subjective targets.
Conversely, the rank-and-file employee evaluations pay less heed tofinancial performance. Table 1 shows the appraisal sheet used for the rank-and-file
employee evaluation. According to Table 1, employees are evaluated on six items: “jobresponsibility” (compliance to manuals, office regulation, and so on), “outcome”(depending on the “role” and appraised on the gravity of the job, and “achievement,”
meaning degree of target attainment), “challenge” (refers to targets other than thoseconcerning routine work, set for personal development), “additional points” (“selfreported performance,” to be noted separately), “attitude” (toward work and effort
expended), and “attendance.” These items are weighted, with “Outcome” assuming theheaviest weight (occupying more than half (80 points) of the overall score of 150
points).

5

As discussed later, because Seiren’s factory outputs are sold through the sales department and othercompanies, the factory is set as a profit center.

12

Table 1 Appraisal sheet for rank-and-file employees

Note: Seiren (2007b: 9).

13

4.3 MBOS and training multi-skilled workers
Under the MBOS (referred to in the previous section), improvements inquality, delivery, and cost are often set as targets for rank-and-file employees infactories. These targets are set depending on their jobs and form the basis of the“outcome” evaluation. Moreover, according to an advisor of the company’s corporate
planning department (CPD), in the case of relatively short-term employees, targets can
include a number of suggestions for improvement, which are accompanied by employee
training.
It is especially important to note that the acquisition of skills by rank-andfile employees has considerable effect on their appraisals. Indeed, the training of rankand-file employees as multi-skilled workers is positioned as part of Seiren’s humanresources development policy. Notably, the job quantity of each process is variable,
depending on the ordered quantity. It has to cope with seasonal variations in demandand faces issues in its work processes; for a factory that manufactures items such as
clothes, operation utility may double in some months and decrease by half in others.
The factory, however, has to meet the delivery dates and quality expectations of its
customers. Therefore, Seiren sometimes has to reallocate employees to each process tocope with this situation. Like most Japanese companies, Seiren cannot employ or firepeople on a short-term basis because it adheres to the lifetime employment system.6 To
prepare for such challenges, Seiren constantly trains it employees and helps themacquire multiple skills. These employees are not evaluated only on the basis of theirskills, the targets for which are decided by them during target setting. Their skill
acquisition is also reflected in evaluation items such as “role,” and sometimes, “jobresponsibility” and “attitude.” It can also be reflected in terms of how they respond to a“challenge.”
Its Chief Executing Officer, Kawada, explains how the company copeswith the above-mentioned issues (Kawada, 2007: 45).

Consider a machine used in the finishing process in the second shift. An equipment
operator is informed minutes after a fault develops. He corrects the fault and recovers
the process, but in doing so, work comes to a halt for nearly three hours. If the
6

Generally, in Japan, employment is regarded to be guaranteed for the worker’s lifetime (until theretirement age at about 60-65 years).

14

operation of the third shift is executed in accordance to the initial schedule, output will
fall below the scheduled quantity. A scheduler may consult the relevant section’s chiefs,
stop part of the reprocessing/dyeing work originally scheduled in the third shift,
instruct an employee in charge of dyeing to veer off his regular process and handle thefinishing process, urge the finishing process employee to take over the stalled work-inprocess promptly and send the product for testing, and finally attain the scheduled
output as planned. The interrupted reprocessing/dyeing work may be made up forduring its daily time the following day with the help of other employees. Otherwise,
one of dyeing workers may be asked to assume charge of the manufacturing work-inprocess for the same dye color, and once this task is completed, he may return to thereprocessing work.

This case shows a situation where mechanical trouble in a process canthrow the daily schedule off course, and the output may not be attained as planned. Here,the working sequence and job responsibilities of some workers are changed, thus
helping the factory to attain the scheduled output. In this case, a dyeing worker is
temporarily reallocated to the finishing process. This is possible because factory
employees are routinely trained to be multi-skilled.
When we observed one of Seiren’s factories, we personally witnessed how
such training is routinely executed. A whiteboard hung up on a wall of the factory lists
the skills each factory worker had mastered. As shown in Table 2, round magnets were
stuck on the whiteboard to show the types of skills each worker had mastered. Thissystem makes it possible to assign employees to tasks that may differ from their usual
work, as discussed above. All the employees in Seiren’s factory are trained to be multiskilled. Our interview of a manager of the management section in the factory revealed
that not only production line workers but also employees assigned to the “indirect”
sections of a factory (such as the management section) are sometimes sent to the shop
floor to help the workers there during overly busy periods.

15

Table 2 A list displaying factory employees’ skills
Name
○○○○
△△△△
□□□□

Skill A●●●

Skill B●●

Skill C

：

：

：

：

：

：

：

：

●

………
………
………
………
………
………

Notes: We reconstructed this list based on our observations on the factory floor on
March 28, 2011. “●” in the table denotes round-shaped magnets placed on the chart toindicate the skills possessed by the employees.

5. Budget revision and reassignment of multi-skilled workers
As noted earlier, Seiren’s MBOS links its budgetary management system tothe personnel evaluation system. We now explain the company’s practice of budgetary
management.

5.1 Budgetary target of the factory
Each factory manager at Seiren is responsible for attaining his respective
divisional or departmental target, as developed from the annual plan. This attainment islinked to the personnel evaluation.
Profit earned is an especially important target for a factory director. Seiren
thus regards a factory as a profit center. The profit in this case is calculated as below.
Profit of the factory = Output  Processing cost  Cost allocated forcommon expenses of headquarters and divisions
Here, “output” refers to the factory’s sales handled by the sales
department.8 Seiren’s sales department procures the main materials such as yarn andgray goods (a woven fabric as it comes from the loom and before it has been submitted
to the finishing process). Then, the factory receives the supplies from the sales
department and undertakes processing after paying a certain internal transfer price.

8

Seiren’s sales department is also considered to be a profit center, and its profit is calculated as below.
Profit of the sales department = Sales－Direct material costs－Distribution costs－Cost allocated forcommon expenses of headquarters and divisions

16

Sales to the sales department comprise most of the factory’s processing sales. 9
Therefore, direct material costs are borne by the sales department, and the costs accruedin the factory are referred to as the processing cost of the products. Thus, the profit of
the factory is obtained by the equation seen above.
As mentioned above, under the MBOS, Seiren’s managers are responsible
for meeting quantitative targets centered on profit. The profit target is the mostimportant KPI for the managers of line departments, including factory directors. Thesetargets, which are set at the beginning of the fiscal year, are emphasized as “necessary
to meet” targets.

5.2 Monthly budget revision
The company holds “division meetings” at the beginning of every month,where managers report on the progress of their sectional plans and discuss future
aspects. This meeting is held for each division, where the performance of the previous
month and future trends are reported by the managers of each division or department
and discussed. The participants include the CEO, division managers, departments under
the division, units under the departments, and the manager of the corporate planningdepartment at headquarters. Each division manager reports his performance and trend to
the CEO. Table 3 provides a schematic of the profit and loss statement used in themonthly report of a factory at Seiren.
In the division meetings, managers also report on their analysis of thevariance between the budget and the actual results of the previous month. In otherwords, the division meeting needs them to report the “modified plan” of the present
month and involves a discussion about its validity. The modified plan refers to therevised divisional or departmental plan, in the light of changes in the businessenvironment (such as modified demand or price of raw material) compared to when theannual plan was originally set. In a division meeting in May, for example, managers
reported not only the performance for April but also presented a modified plan for the
first half, by integrating their performance and the revised plan for the remaining firsthalf (May to September) following the incorporation of the latest change to the businessenvironment. For example, columns (A)-(B) of Table 3 show the extent of changes
9

A part of sales (i.e., the output) of a factory partially includes sales to other companies.

17

between the modified plan (column A) and the original plan (annual plan set at the
beginning of the budgeting period; see column B). Then, the column titled “Remarks”
shows the principal reasons for the changes and the specific contents of the modified
plans.
In the modified plan, the original KPI targets, including profit (“Operating
income II” in Table 3), are not changed in principle; rather, the most important aspect inthis regard is how managers will attain the KPIs. An advisor to the corporate planningdepartment, who has been involved with the design of Seiren’s management system fora long time, explained the following.

The CEO rigidly checks the status of the monthly sales, outputs, and expenses, while
managers are allowed to modify parts of the budget as long as they can attain theirrespective target profits (personal communication via interview on November 23,2007).

Of course, the CEO will draw attention to the modified plan if its expenses
have increased excessively compared to the original plan, despite the fact that theformer may attain its KPI targets. However, in principle, the highest priority is placedon ensuring that the modified plan is robust enough to attain the KPI targets set at the
beginning of a fiscal year.
On the other hand, the KPI targets basically remain unchanged during thebudgeted period as they are linked to the personnel evaluation of managers under the
MBOS. A manager of the company’s improvement promotion department at theheadquarters explained as follows.
Monthly plans are often changed (from the original plans). … A customer’s orderschedule varies from that of a month before; orders for a certain product number may
have decreased, while others may have increased. Therefore, we typically modify themonthly plan. However, as we necessarily have to pursue profit, we must adhere to
the KPI targets set in the original plans (personal communication via interview on
February 12th, 2009. The text within the parentheses was supplemented by theauthors.).

In the case of a factory, its profit or “Operating income II”, listed at the18bottom of Table 2, is the most important KPI in a monthly division meeting. While thisnumber is essentially calculated as the output minus a variety of costs incurred by thefactory, even if the output appears to be less than the original plan owing to changes in
the market, the factory’s profit target does not change. Therefore, the factory director
has to make efforts to reduce costs in order to attain the original target despite thechanged output.
Therefore, each division examines ways to reduce costs, weaving them intoa modified plan, and reports these ideas in a division meeting. In other words, they“plan” to attain the original KPI based on the latest estimation of the businessenvironment. The profit and loss statement shown in the row titled “Modified plan” inTable 3 is a monetary expression of the modified plan.
For example, in the case of expenses accrued for raw material and dyes
(which constitute the majority of variable costs), the reduction targets are already set
with respect to each lower-rung employee in the beginning of the budgeted period.
However, when attaining the original factory’s profit target is not enough, measures
such as process change are considered and determined, and the amount of cost reduction
is estimated and incorporated in the modified plan. In addition, when it appears that theoutput may fall short of the original plan owing to rapid business fluctuations, thefactory has to reduce its fixed costs. In such a case, factory managers examine ways toreduce controllable fixed costs for the current period, for instance, by reducing businesstravel expenses and shifting repair costs by postponing less urgent repairs.
Moreover, the labor cost, which covers most of the uncontrollable fixed
costs, 10 can be shifted between factories or months within the current period via
budgetary management. To do this, a factory and its production management
department or production planning department would need to coordinate. If April andMay are considered as off-season and on-season months respectively, the number ofoperating days in April can be decreased, and this decrease can be added to the monthof May. In such a case, the budgetary control for the labor cost of the transferred
operating days is shifted to May.
In addition, it is notable that when one factory is in off-season and another
10

When the labor cost of the current month is shifted to another month, the cost of the current monthdecreases in the budgetary management. However, the amount of salary workers receive does not vary.
Therefore, the labor cost is included under “Uncontrollable” fixed costs in Table 3.

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is in on-season, the former can lend its workers to the latter through coordination withthe personnel department at headquarters and the production planning department. Thisis analogous to transferring the labor cost of workers from the lending factory to theborrowing one. According to such a system, although the labor cost of a factory isessentially part of its fixed costs, it is controlled flexibly in the budgetary management,
and the factory director is urged to minimize the idle time of workers within a given
period.

Table 3 A schematic of a briefing paper presented at a division meeting
reporting the profit of a factory
Performanceof last month

Account

Modifiedplan (A)Original plan(A)-(B)(B)

Remarks

Variable costs

Outputxx expense：：
Sum

Uncontrollable
fixed costs

Controllable
fixed costs

Marginal profit
xx expense：：Sum
xx expense：：
Sum

Allocation cost forcommon expenses
Operation income II

Notes: We have reproduced the table presented in our interview with the company’s
personnel on February 12, 2009.

5.3 Liaison meeting supporting diagnostic and interactive uses of the budget
The actual profit of the factory, as discussed above, is measured as a roughestimate on a daily basis. Each factory has an accounting system , which provides a“Production management daily report” (PMDR) at around 11 a.m. every day. It shows

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the amount of production by product numbers, profit and loss performance, and theadherence to the monthly budget. Following the publication of the profit and loss
performance of the previous day, a “Liaison meeting” is held for about 30 minutes to anhour in the factory every day. The factory director and all its managers and chiefs
participate in these meetings, share information about the daily progress in terms of thebudget, and examine ways to cope with the situation faced on that particular day.
Specifically, reported items include cumulative profit and loss performance,
progress on the factory floor, and number of defective goods from the previous day’s
production. These reports thus explain how the situation has changed compared to theoriginal schedule or how materials are used and so on, when there is variance between
the day’s results and the original plans regarding profit and the work process. In
addition, as a way to cope with such situations, the meeting’s participants examine how
they may alter their daily schedule through shift changes, personnel reassignments as
backups, and so on. A manager of the improvement promotion department at
headquarters provided the following explanation (interview on February 12, 2009; thetext within the parentheses has been supplemented by the authors).

(In recent years especially,) much value has been placed on the delivery time andmeeting customers’ needs and providing customer satisfaction. Therefore, whencustomers make changes (to the daily schedules), we have to respond accordingly.
So, we first consider how to modify our daily schedule when there is a significant
increase (in the amount of production). As each machine has its own process
schedule on the shop floor, … it has to be set again (to meet the predefined deadline
and quality)…. Then, … all the managers on the shop floor are informed of themodified daily schedule, quantity of work, sales, number of tests, and accordingly,
accrued profit performance.

6. Discussion
6.1 Resource allocation as part of budgetary management
As we described above, budgetary management aspires to address themodified demand caused by environment-related changes during the budgeted period.
The personnel evaluation of a factory manager is linked to his/her original profit goal,
wherein he/she revises the plan on a daily and monthly basis and is motivated to achieve

21

the original profit goal.
Frow et al.’s (2010) case study describes a mechanism in which thebudgetary goal can be revised through belief systems and boundary systems, so as toenhance the company’s response to changes to its environment. Managers coordinate
resource reallocation and revise budgetary targets interactively (Frow et al., 2010). Thisis called continuous budgeting. On the other hand, Seiren’s budgetary targets are fixed
because the degree of attainment of the original budgetary goals is, to an extent, linked
to personnel evaluations under the MBOS, although some subjective evaluation is also
undertaken. Then, Seiren copes with the modified demand resulting from the changes
using fixed budget goals and flexible action plans. To make this system work, Seirenapplies a loosely coupled budgetary management system, in which (as the namesuggests) budgetary targets and action plans are loosely coupled. Budgetary targets are
based on the action plans devised at the beginning of the budgeted period, and suchplans are called “coupled” plans. However, the action plan can be changed separately
during the execution phase, which means that the relationship becomes loosely coupled.
The original action plans set at the beginning of the period may still help attain thebudgetary targets in the premised demand environment. However, the demandenvironment has uncertainty. When a gap between the premised plan and the actual
situation is recognized, the original plan loses its suitability with regard to attaining thebudgetary target. Therefore, the new action plan will need to be feed-forwardly(Nishimura, 2003), drawn up to match the initial budgetary targets.
The action plans (the premise of budgeting) addressing human resource
arrangements or time schedules, as well as the budgetary targets in Seiren’s
management accounting practice, are “responsive,” but each event also preserves its
own identity and some evidence of its physical or logical separateness (Weick, 1976,
p.3). We explain this relationship in Figure 2.

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Figure 2. A Schematic of Seiren’s Management Accounting Practice

Budgetary targets are used for personnel evaluation in the target
management system. To ensure fairness, these targets cannot be changed during thebudgeted period. Conversely, to help the factory achieve its budgetary target, resources
are allocated during the planning process conducted at the beginning of the budgeted
period. This allocation can be changed during the said period. Concretely, the estimatedoperating rate is modified because of the environmental uncertainty. In such a situation,
the factories change their action plans and reallocate resources in terms of lending andborrowing of personnel, which is decided during departmental or liaison meetings. If
such lending and borrowing of personnel occur, the labor costs are transferred to theborrower factory from the lender factory.
In highly uncertain economic environments, budgetary management poses
limitations because budgets are set based on action plans that are made at the beginningof the budgeted period (Hope and Fraser, 2000, 2003). Frow et al. (2010) argued about
the efficiency of budgetary management in uncertain situations, showing a mechanismthat allows changes to budgetary targets and resource allocation through a belief system
and a boundary system. Seiren’s case shows a different mechanism, in which a loosely
coupled relationship between fixed budgetary targets and action plans enables
budgetary management in uncertain situations.

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6.2 Personnel evaluation to enhance resource allocation during the budgeted period in
the case of lifetime employment
As discussed above, Seiren uses loosely coupled budgetary management tocope with modified demand brought about by changes to the company’s environment
through resource reallocation during the budgeted period. Human resources may also be
temporarily reallocated under such circumstances. Like other Japanese companies,
Seiren follows the lifetime employment policy and cannot fire employees owing toshort-term changes in demand (Abegglen, 1958). Seiren’s management system isintended to maximize the employee capacity usage rate to cope with changes in demand.
Seiren trains its employees to possess multiple skills. The personnel
evaluation exercise also helps employees enhance their skills (an example of a loosely
coupled budgetary management system). To deal with changes in demand or technicalspecifications in the Japanese labor market, which is known for its low mobility, it isnecessary to be able to utilize the company’s internal human resources strategically(Imai and Itami, 1984). Seiren’s labor education system does this by enabling its
employees to work on other lines or in other factories within the company.
The personnel evaluation system at Seiren also obtains employee consent
for the above-mentioned temporary labor arrangements during the budgeted period. As
explained above, multi-skilled labor education forms part and parcel of the employee
education system at Seiren. Therefore, learning skills are built into personnel evaluation.
It is important to note that Seiren’s employees are evaluated not only by their ability toperform their own duties but also by their capacity to learn new tasks. As most Japanesecompanies used job grade evaluation or comprehensive job performance evaluation(Koike, 1994), Seiren’s case is no exception. In its objective management system,
learning a variety of skills is considered to be part of the employee’s job performance
improvement, which is directly and indirectly linked to personnel evaluation. Factory
employees are motivated to learn a variety of skills through this system. This makes it
easier for factory managers to reallocate resources by changing employee positions
temporarily to match demand.
Seiren also flexibly reallocates monthly or daily production capacity (fixedlabor costs as a whole) to departments with high operating rates. Multi-skilled labor
education and the personnel evaluation system allows the organization to consider its

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fixed labor costs as a whole in terms of variable costs for its factory or one of its lines.
The system enables Seiren attain its original budgetary targets. Thus, Seiren’s
management control package (so termed by Otley (1980)) helps it respond flexibly tochanges as well as attain its original budgetary targets during the budgeted period.

7. Conclusion
This paper discussed a budgetary management process that enables acompany to cope with modifications in demand brought about by environment changes.
We presented a case study of a Japanese textile manufacturer called Seiren. The existing
literature refers to the process used to revise budgets or action plans so that a company
may attain its objectives. This paper contributes to the literature by identifying a novel
budgetary mechanism to help the company cope with changes in the businessenvironment. Concretely, Seiren does not change its original budgetary targets
depending on the situation; rather, it uses the loosely coupled relationship between its
initial budgetary targets and action plans to attain the former through feed-forwardchanging actions. In doing so, it addresses the situation by reassembling its total
budgetary plan.
Our second contribution is revealing what kind of mechanism enables
resource reallocation in the Japanese context, namely, the lifetime employment system.
Seiren places emphasis on educating its employees, to make them multi-skilled workers,a key factor enabling the reallocation of human resources. Furthermore, employees needto consent to such temporary arrangements. This is influenced by personnel evaluationand their job contracts, which emphasize the importance of comprehensive job
performance, including continued learning to expand future capabilities. Taken together,
Seiren copes with short-term changes in the business environment using a management
control package that consists of budgetary management and personnel evaluation (Otley,1980).
As our third contribution, our case study reveals another, as yet
undiscovered, implication regarding the mechanism of budgetary management. Hansen
et al. (2003) insist that while “prior research has explored the links between budgetingand strategic planning, the link with operational planning remains largely unaddressedin the management accounting literature.” This paper discusses the latter link using

25

Seiren’s budgetary management system. Seiren’s sales program and production plans
are modified in line with changes to demand during the budgeted period. In addition,
the company aims to meet its initial budgetary targets by rebuilding daily or monthly
labor arrangement/reallocation plans. We need to discuss this relationship between
budgetary planning and operational planning in greater detail. Such a discussion will
form a topic for future research.
This paper also suffers from some limitations, namely, the possible lack ofgeneralization. The results of this paper are derived from a single case study of aJapanese company using the lifetime employment system and practicing multi-skilledlabor education. To be able to generalize this analysis, a more robust investigation via
other case studies or a statistical analysis using questionnaires must be performed.

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