Establishing budgeted amounts (a) The text discusses two basic philosophies as to the levels at which budgeted amounts should be set. Identify and describe briefly each of these two philosophies

(b) Which of the two management philosophies would be more likely to elicit the following comment?

"At our company, budgeted revenue is set so high and budgeted costs so low that no department can ever meet the budget. This way, department managers can never relax; they are motivated to keep working harder no matter how well they are already doing."

What will be an ideal response?

(a) The text identifies the two philosophies as (1) the behavioral approach and (2) the total quality management approach.
The behavioral approach assumes that departmental managers will be most highly motivated if they view the budget as a "fair" basis for evaluating departmental performance. Budgeted amounts are set at reasonable and achievable levels-- levels which can be achieved through reasonably efficient operations. Failure to stay within the budget is viewed as unacceptable.
Under the total quality management approach, the entire organization is committed to the goal of completely eliminating inefficiency and non-value-adding activities. In setting perfection as the goal of the organization, budgeted amounts may be set at levels representing absolute efficiency. Even a highly efficient department should fall slightly short of the budget standards.

(b) The budget referred to in the quotation embodies the assumptions of the total quality management philosophy of setting budgeted amounts.