Behavioural Issues Within Budgeting

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Behavioural Issues Within Budgeting

Objectives of Budgeting

Through budgeting organisations can provide information for strategic planning and control, these are the two main objectives of the budgetary control system. Management and management accountants must work together and operate a system that achieves these objectives, they do so through a system called variance analysis. Management accountants compare the actual results against the budgets; they then send reports to the management concerning the extent to which budgets are being met. Management can then control activities by making possible steps to stop situations where the budget is being ignored or overlooked.

To meet their controlling and planning needs, management and management accountants adapt the feedback and feed-forward principles (types of controls). As well as feedback, budgetary systems consist of feed-forward controls, where expected outcomes can be compared with desired outcomes. A recent report Tayles (1998) suggests that, “…feedforward control consists of a prediction being made of anticipated future outputs. If the expected outputs differ from what outputs are desired, control actions are implemented to minimise these differences. Control is therefore, achieved, if the control actions are effective, before any deviation from the objective output occurs”. Feedback is the detection of a deviation between actual results and an objective; normally this is carried out after the event and is essentially error based. Research has shown that up to date, accurate feedback has a motivational effect, delay and inaccurate data are demotive. Most organisations adopt these controls, as they are effective and aid the pursuit of a budgetary control system.

Target setting is another objective of budgeting and may possibly have motivational benefits. Setting targets that are realistic and clearly stated will encourage employees to make more effort to achieve it than they might otherwise do. However, the motivational effect of budgetary control is far from clear, as we shall see later in this report. In addition, there is no point in having targets and controls if they are kept a secret. Through communication, organisations can enhance the level of information that flows from top management to employees (subordinates).

These are just some of the arguments for budgeting. The rest of this report will concentrate on the behavioural issues in a budgetary control system.

Behavioural Considerations

When drafting and planning a budgeting system there are behavioural issues to consider as budgets can have implications for human behaviour and, budgeting can have harmful side effects on performance. There is a danger that employees will concentrate solely on the objectives set by the budget, regardless of whether or not it is organizationally desirable. This means that individuals would set out to exploit the rules of the budgetary control system to boost their individual performance, ignoring other areas not monitored by the control system. Drury (2000, p.600) found that “…actual behaviour may be modified so that desired results appear to be obtained, although they may have been achieved in an undesirable manner which is detrimental to the firm”. In addition, budgets may give management a means of judging the performance of their teams. It’s assumed that, the setting of performance measures should complement the setting of new strategies and objectives and the implementation of action plans for the organisation. However, that adherence to the budget alone cannot measure all aspects of a manager’s performance. Therefore, it is important that managers achieve their targets frequently enough to give positive feedback in their efforts.

Another behavioural aspect to consider when introducing a budgetary control system is the controls set by the new system, as these may cause negative attitudes. A potential cause of negative attitudes is the way a control is applied, if targets are considered unachievable and applied too rigorously, they may cause negative attitudes. This may also lead to harmful side effects such as the lack of goal congruence and organisational performance. However, if care is taken in designing the control system negative attitudes may be avoided. Drury (2000, p.601) makes a similar argument, “The way that a control system is applied can be just as important as the design issues in determining the success of a control system”.

Importance of Behavioural Considerations in the Budgetary Process


Interaction of managers and employees or budgetees to the targets that are incorporated in their budgets is known as participation. Tayles (1998) suggests that, “…participation in the budget process and discussion over how results are to be measured has benefits in terms of budget attitude and performance of the budgetee”. This would be of an advantage to an organisation as employees would be more receptive of the targets and more committed to achieving them. In addition, the levels of staff morale would be greater than before. Participation can also improve communications and tends to improve the degree to which budgets are met. For example, participation creates a common understanding of the organisations objectives and makes achieving goals more likely.


Communication is a necessary activity in all factors of management and can be broadly defined as an exchange of information to bring about a mutual understanding between two parties. Welsch (1988)

Defining or clarifying the lines of communication within an organisation can be a powerful aid in the construction of the budget. Communication can have an important part to play in the budgets objectives, targets and responsibilities throughout the organisation. Carried out properly, this can have considerable benefits in promoting co-operation at all levels. Therefore, in order for an organisation to wok effectively there must be lines of communication so that all parts can de kept fully informed of the part they are expected to play in achieving the budget. This aspect can have important behavioural implications throughout an organisation as the attitude of the person who receives the communication may be affected.


By setting challenging but realistic targets, well-designed budgets can play a significant part in motivating managers and employees to perform in line with the organisational objectives. The targets must be clear and achievable, and the manager should participate in setting his or her own budget, as it is more likely to be acknowledged. Generally, it’s believed for budgets to motivate, higher objectives should be set. The levels of expected performance that are set influence the motivation of managers responsible for target achievement.

If levels are set too high, then there is a strong disincentive to management involvement in the budgetary process, and a low level of motivation. It levels are set too low, then managers can achieve targets easily despite inefficiencies. This is known as budgetary slack. Setting appropriate levels of attainment in budgets is a complex and difficult activity with an important behavioural dimension. Therefore, it can be said that motivation is a process of arousing and sustaining goal-directed behaviour induced by the expectation of satisfying individual needs.

Goal Congruence

Goal congruence means that as people work to achieve their own goals, they also work to achieve the goals of the organisation. Nevertheless, there is a danger that employees will concentrate only on what is been monitored, leading to a lack of goal congruence. Focused on preventing this undesirable behaviour and encouraging goal congruence is controls, for example, action or behavioural controls.

Action or behavioural controls involves managers watching employees as they go about there work and if the managers know what actions are desirable (or undesirable) the desired outcomes will come about. Performance measures may be used as a good indicator of what is desirable to achieve an organisations goals and some measure may encourage goal congruence or organisationally desirable behaviour. For this to be effective management must also ensure that desired actions are taken.

Goal Definition

A further use of budgets is as a basis for setting performance standards and rewards, for example, bonus, status or enhanced promotion prospects are often linked to budget attainment. This may be defined as a process theory of motivation that focuses on the process of setting goals, Emmanual (1992). It is argued that the natural human preference to set and strive for these goals is useful only if the individual both understands and accepts a particular goal.

Therefore fundamental to goal attainment is:

*an understanding and acceptance of a particular goal (goal congruence)

*skills to achieve the goal

*confidence that they have the skills to achieve the goal

*a reasonable expectation of achieving that goal

People work more efficiently when they have goals and targets. Therefore, if the targets are agreed and accepted by individuals, they should achieve goal congruence and motivation.


It will be apparent from this report that budgets serve various purposes and in some cases, these purposes can be in conflict and have a consequent effect on management and employee behaviour. Nevertheless, if controls are put in place that focuses on preventing undesirable behaviour, employees of an organisation would be discouraged from taking part in such actions.

Budgets serve as a means of forecasting, planning, control and a channel of communication and motivation. But, a good budgetary system should be designed to:

*meet the objectives regarded as most important by senior management

*provide information which is useful in meeting those objectives

*Reduce the risk of unintended and undesirable behaviours.


Drury, C. (2000) Management & Cost Accounting, 5th edition, Thomson Learning

Emmanual, C. Otley, D. Merchant, K. (1992) Readings in Accounting for Management Control, Chapman & Hall

Tayles, M. (01 Dec 1998) budgetary control – the organisational aspects

Available at:

[Accessed 7 April 2002]

Welsch, G.A. Hilton, R.W. Gordon, P.N. (1988) Budgeting – Profit Planning and Control, 5th edition, Prentice Hall


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  • University/College: University of Arkansas System

  • Type of paper: Thesis/Dissertation Chapter

  • Date: 26 June 2016

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