9.2 The behavioural aspects of budgeting

Question 1

There are two ways in which a budget can bet set

Answer 1

• Top down (imposed) - Budget is set centrally with little involvement by the budget holder. This reduces the scope for slack, improves coordination and avoids some goal congruence issues
• Bottom up (participative) - Budget holder is involved in setting the budget. This should make it more accurate and give better motivation to achieve it

Question 2

Budgets and motivation

Answer 2

• Motivation is the drive or urge to achieve an end result
• If employees and managers are not motivated they will lack the drive to improve their performance and help the org achieve its goals and move forward
• Success should be rewarded and failure should be penalised so that it is seen as a benefit to better rather than just achieve the target

Question 3

If a budget is to have any influence on performance

Answer 3

• The recipient must be aware of its existence and feel committed to achieving it
• It must be set at the right level of difficulty to act as a motivator, both unrealistic and over generous targets will be demotivating
• The optimal level of tightness will depend on the situation and the personality of individuals

Question 4

Setting a budget target that is too easy

Answer 4

• Actual performance will be a little better than the budget but will not be optimised
• Managers don’t work to their full potential if they know a lower level of performance will still meet the budget
• If greater effort were applied a higher target may be achieved

Question 5

Setting a budget that is too difficult

Answer 5

• Based on ideal levels of performance means managers might become discouraged by what they regard as unattainable standards
• This may demotivate and as a result actual performance may fall short of what might reasonably have been expected

Question 6

Finding the right level of difficulty

Answer 6

• The aim should be to agree to a budget that falls between these two extremes and incorporates the right degree of difficulty which will lead to optimal level of performance
• At this level the budget should be challenging enough to motivate managers to optimise their performance without being too ambitious (tough but attainable)
• The right level of difficulty is that which is acceptable to the individual manager

Question 7

The purposes of budgets can be enhanced or distorted by manager involvement

Answer 7

Enhanced
* Planning
* Communication
* Motivation

Distorted
* Coordination
* Evaluation
* Authorisation

Question 8

Ethical implications in budget preparation in a bottom up approach where managers are allowed a high level of participation

Answer 8

• Inclusion of slack
• Lack of goal congruence
• Over stating results
• Budget constrained management styles

Question 9

Ethical implication - Inclusion of slack

Answer 9

• Managers may make the budget easier to achieve in order to protect financial rewards, improve performance appraisals, reduce workload etc.
• This creates unwarranted rewards, resources not being allocated to other areas that need them and implications for other budget holders trying to coordinate their activities
• This can result in failure to achieve purposes of coordination, utilisation, motivation and evaluation

Question 10

Ethical implication - Lack of goal congruence

Answer 10

• Manager puts personal goals ahead of org goals and pursues strategies not in line with org strategic objectives which could cause the org to fail to meet these

Question 11

Ethical implication - Over stating results

Answer 11

• Manager might produce overly optimistic budgets in order to make performance look as favourable as possible
• This can lead to unethical practices of over stating results or fraudently recording non existing sales in order to satisfy the overly optimistic budget
• This can result in undue rewards for budget holder and false info being given to other key stakeholders
• These practices can cause negative reactions from wider stakeholders such as public

Question 12

Ethical implication - Budget constrained management styles

Answer 12

• When performance of a manager is assessed by ability to meet budget they many be likely to adopt a conservative approach to new bus opportunities (turning down ones where benefits will only be seen in long term)
• They favour projects that are more amenable to construction of budgets (those that involve little uncertainty and few unknowns)
• Budget holder may make decisions which focus on short term performance at the expense of long term good health of the bus

Question 13

Ethical implications in budget preparation in a top down approach

Answer 13

• Undue pressure on the budget holder
• Pseudo participation
• Budget as a pot of cash

Question 14

Ethical implication - Undue pressure on the budget holder

Answer 14

• The budget preparer may put undue pressure on the budget holder to achieve a desired result
• Budget preparers often set challenging (stretch) goals to motivate and improve performance
• This can cause stress for the budget holder and cause them to employ unethical practices in order to achieve the target

Question 15

Ethical implication - Pseudo participation

Answer 15

• Budget holders are allowed to feel that they have some input and participation in the budget but actual decisions are approved and controlled centrally
• This can ultimately lead to poor motivation and job satisfaction

Question 16

Ethical implication - Budget as a pot of cash

Answer 16

• Some managers might consider the budget as a sum of money that has to be spent
• This happens particularly in situations where performance is mainly gauged through comparison to actual and budget spending
• If they whole pot is not spent it could be reduced the following year

Question 17

Further ethical issue in the budgetary control process - Management by exception

Answer 17

• When reviewing the performance of the budget holder there is normally a system of management by exception
• This means that budgets are only reviewed for unusual areas of performance where there is a substantial difference between actual results and budget
• Managers who achieve performance near to budgeted may feel they receive no attention or consideration
• May cause them to feel undervalued and demotivated

Question 18

Further ethical issue in the budgetary control process - Broaden area of responsibility

Answer 18

• If top down budgeting is used there could be an unethical desire to broaden the area of responsibility for what is controllable by the budget holder
• Such as central costs spread out to departments that have no control over the activity
• This can impact on the appraisal of the budget holders financial performance and remove their trust in the entire budgeting process