Question

choose one point on the behavior implication of budgeting and describe the point clearly using your own words.

Answer 1

Answer :  Explaining below 2 behavioural implications of budgeting below :

Budgetary Slack (Cushion):

Budgetary slack, also known as padding the budget, takes place when a manager deliberately underestimates revenues, overestimates costs and requests more funds than needed to support the budgeted level of activities. The difference between the revenue or cost projections that a person provides and a realistic estimate of the revenue or cost is called budgetary slack.

In all organisations, there is a tendency to introduce slack or a cushion in the budget. For instance, subordinate managers can know on the basis of past experiences that their budget propos­als will be cut by senior managers and therefore will be tempted to pad certain expenses or make low-revenue estimates. On the contrary, the senior managers knowing the padding habits of their subordinate managers may be tempted to increase the level of expected revenues and reduce the budgeted expenses.

Similarly, the sales managers underestimate their sales projections; the controller introduces slack by maintaining excessive cash balances, etc. The degree of slack tends to grow in good years, when satisfactory profits are easily attainable, in bad years slack is voluntarily decreased throughout the organisation.

There are three primary reasons for padding the budget or budgetary slack. First, people often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.”

Second, budgetary stack often is used to cope with uncertainty. A departmental supervisor may feel confident in the cost projections for 10 cost items. However, the supervisor also may feel that some unforeseen event during the budgetary period could result in unanticipated costs. For example, an unexpected machine breakdown could occur. One way of dealing with that unforeseen event is to pad the budget. If nothing goes wrong, the supervisor can beat the cost budget. If some negative event does occur, the supervisor can use the budgetary slack to absorb the impact of the event and still meet the cost budget.

The third reason why cost budgets are padded is that budgetary cost projections are often cut in the resource-allocation process. Thus, we have a vicious circle. Budgetary projections are padded because they will likely be cut, and they are cut because they are likely to have been padded.

In order to reduce excessive slack, top management may introduce strenuous cost-cutting meas­ures and put too much pressure to decrease the slack. However, in reality, their attempts may create conflict in the organisation, may widen differences among managers, and top management can be looked upon as being arbitrary, and ignorant and insensitive of the needs of lower-level managers in their achieving budgetary goals.

The solution lies in finding a level of slack that maintains efficiency and avoids the conflict caused by excessive pressure to reduce the slack. Further, top management should carefully review budgets proposed by subordinate managers and provide input, where needed, in order to decrease the effects of building slack into the budget.

Also, managers can be given incen­tives not only to achieve budgetary projections but also to provide accurate projections. This can be done by asking managers to justify all or some of their projections and by rewarding managers who consistently provide accurate estimates.

Dysfunctional Behaviour:

Budgets can bring positive behaviour among the people when the goals of individual managers are found in conformity with the goals of the organisation. The perfect matching (or near perfect matching) between the organisational and managerial goals is often referred to as goal congruence. The managers who participate in the budget making process may feel happy in producing a fair budget in terms of organisational goals and objectives.

Such a budget may induce and motivate others to bring excellence in their performance. But sometimes, due to improper implementation of the budget and unrealistic management expectations, the reaction of subordinate managers are found to be negative, which in turn has adverse impact on achieving the organisational goals. Such a negative behaviour is known as dysfunctional behaviour which is de­fined as an individual behaviour that is in basic conflict with the goals of the organisation.

“Management can create negative budgeting attitudes in several ways. One of these is using budgets or giving the impression they are being used, to squeeze every ounce of productivity out of employees, or solely to identify poor performers or as a means of restricting an employee’s ability to perform If budget variances are always viewed as “bad news”, subordinates will quickly adjust their behaviour to avoid negative evaluations. Necessary managerial actions may not be taken because of fear of penalties. Unless top management is willing to recognise the need for flexibility, reality and positive change, lower management support quickly dissipates.”

In order to create and promote a reasonable degree of positive behaviour among the people in an organisation, a budgeting system should possess the following important features or elements:

1. Frequent feedback on performance.

2. Flexible budgeting capabilities.

3. Monetary and non-monetary incentives.

4. Participation.

5. Realistic standards.

6. Controllability of costs (Non-controllable costs, if included in a budget should be separated from controllable costs and labelled as non-controllable.