Question

Subject: Budgeting and Budgetary Control

Explain behavioural consequences of budgeting.

Answer 1

Budgets are part of management control designed to promote the efficient use of resources and providing support for other critical functions. The extent to which any budget is successful is very much dependant on its acceptance and the attitudes of workers towards it. This paper focuses on the crucial role of the behavioural aspects of budgeting and how an understanding of its importance can contribute to a successful budgeting process. It describes the nature of budgeting and analyses the budgeting process in organisations. The paper shows why budgeting is important to firms and describes the impact budgeting has on human behaviour such as motivation and dysfunctional behaviour. The behavioural aspects of the budgeting process are also examined.

The way in which budgets are administered impacts on their effectiveness in helpingto achieve an organisation’s goals. ‘The budget in any company has a dual role of being a forecast of the year and a yard stick of managerial performance

It can also be argued that by using the budget to measure managerial performancethere is an attempt to use it as a tool for control. If this is linked with a reward and/orpunishment systemthere is a general tendency for managers to distort the informationthey pass on to their superiors, so that the unfavourable items are underemphasised’.such distortion of information is undesirable and counterproductive.Some organisations use sanctions and punishment to encourage adherence tobudget. The use of sanctions and punishment is synonymous with an authoritarianstyle of management.

Dysfunctional behaviour may be caused by the following budgetary problems:•Budget targets that are perceived by employees as too difficult to attain will resultin resentment and a feeling of stress.•Budget targets that are perceived by staff as too easy to achieve do not provide achallenge and may lead to a slipshod performance by staff.•Managers may experience a loss of autonomy by being hemmed in by the budgetand not having sufficient flexibility to use their own initiative.•Managers may become narrow minded, focusing only on their own department,and create disadvantages for the organisation as a whole.•The emphasis on financial goals to the detriment of nonfinancial goals may havea debilitating effect on the organisation