Standards Fixed by the Budgetary Process


The pressure on individuals that is being exerted by the budgetary process for meeting the performance standards have to be limited to their extent. Otherwise, such pressure itself will become detrimental in maximizing the contribution of the individual employees. Similarly, the norms and standards of performance should be so fixed that the employees should be able to attain them with more effort. Any unattainable standards fixed by the budgetary process will lead only to frustration among the employees.

In the early research by Lowe & Shaw, (1968) the process of budgetary control was considered as an element of behavioral theory in which the budgets pose as enablers executing the resolutions of the coalitions and conflicts of the management. Because of the fact that there are certainly human factors involved in the budgetary control process the budgets are often developed in many organizations through a complicated and complex process. Social scientists have made an extensive study into the behavioral aspects involved in budgeting. On the basis of these studies, budgeting has been construed as a method of communicating the goals of the organization to the employees at the appropriate levels. The objective of such communication is to achieve the desired goals of the organization by facilitating, coordinating, and controlling the different sections of the organization. In order to effectively carry out this process, it is vitally important for managers to develop suitable attitudes and ideal strategies which will have the effect of cultivating and maintaining supportive and cooperative relationships with the employees at all levels of the organization. This requires the development of a sense of ownership of budgets among the staff.

The preparation and implementation of the budgetary control process have their own impacts on the behavior of the individuals associated with the process in the organizational context. Similarly, the behavior of the individuals also has a telling effect on the formulation of the budgets. This paper attempts to produce a comprehensive study on the behavioral aspects of budgetary control from both perspectives in the context of the 21st Century.

The Essence of Budgetary Control Process

The budgetary control is defined to include the processes of planning, controlling, coordinating, and motivation through the monetary expression of organizational objectives communicated to different departments within the organization. Budgeting usually takes the form of quantitative and monetary plans drafted for a period of one year. According to Hofstede, (1968), budgetary control is the organizational planning process translated into monetary objectives. The essence of the budgetary control process is the influencing of the management behavior by establishing set performance standards and also monitoring the achievement of these standards established.

Budgets as Targets

Since budgets represent conclusive and quantitative targets for assessing the performance of the employees, they can be easily used in employee evaluation and motivation. In order to use budgets for control purposes, it is important that the managers consider the behavioral aspects of budgeting very carefully. In the present day context, there are two basic approaches have been established to fix the levels at which the budget amounts can be set. These approaches are:

The Behavioural Approach – In this approach the budgeted standards are set at levels that are reasonable and achievable. The budget is regarded as a fair basis on which the departmental performance can be evaluated. It is assumed that a department that operates very efficiently should be able to surpass the budget standards. The failure of the managers to stay within the budgeted standards is viewed as an unacceptable level of performance.

The Total Quality Management Approach – In this approach the main thrust is on the ability of the organization to completely eliminate inefficiencies and non-value generating activities. At the same time, the organization will strive to achieve perfection in all aspects of its operation. The budgeted amounts are set at those levels which represent complete efficiency. In areas where there are small failures, the management diverts its focus to those areas for effecting possible improvements.

Stedry, (1960) was the first to study the budget difficulty and the level of aspiration of the individual to perform (p 61). Stedry, (1960) observed that the performance level of the individual worker is often conditional on whether the budget is imposed. In case the budget standard is imposed then the performance level is linked to the level of difficulty involved in attaining the budget. There can be an improvement in the performance of the managers if the budget levels are made in tune with the motivational structures of the individual managers. Becker & Green, (1962) suggested that frequently comparing the actual performance with the budgeted level and providing feedback to the employee thereon would enable them to achieve higher performance.

Budgeting and Motivation

The relationship between employee motivation and budgets has also received the attention of many research scientists in the area of accounting research. Rockness, (1977) found that “difficult budgets, a predictable reward structure, and formal feedback on results resulted in a better performance and a higher level of employee satisfaction”. However, Brownell & McInnes, (1986) observe that despite the existence of a positive relationship between budget participation and performance, the relationship cannot be explained using the expectancy theory since the path identifying the relationship between them could not explain the impact of the relationship. The results of the studies confirm the utility of the expectancy theory of motivation in developing varied models of budgetary motivations. However, according to Ferris, (1977) the model has not fared well in predicting the performance of audit staff members. He found that while the expectancy model was not of much use in predicting the audit staff performance, it has played a significant role in predicting employee job satisfaction and through this confirming the motivational effect of budgeting only on satisfaction.

Budget Participation

The issues of participation and performance measurement within the time frame of the budget period were highlighted as some of the important behavioral issues by Lowe & Shaw, (1968) in their study. They found that the forecasts were basically linked to what the managers wished to hear and represented their personal self-interest in terms of compensation and promotion opportunities for them.

The time frame for the budgeting process whether short or longer durations is an issue that has been subjected to several studies such as one by Merchant, (1990) who has observed the side effects of the pressure to meet the short-term budget standards. The study by Merchant, (1990) has found evidence to prove that the short-term pressure to meet the budget results has even led to an environment of data manipulation. Merchant & Manzoni, (1989) also have confirmed this position and they observed that the managers faced the prospects of losing the resources, bonuses, and even their jobs if there is a failure on their part to meet the short-term results successfully. Allen, (1998) describes the rapid technological and other changes to the present day business environment and argues that the changes in the business environment make the traditional rigid approaches to budgetary control obsolete and pointless. He opines that it is no longer of any use if the actual results are compared with any forecasted standards fixed up to 15 months previous to the budget period.

Areas of Behavioural Aspects in Budgetary Control Process

There are two most important areas with respect to behavioral issues that need consideration. They are:

  • Designing the whole process of drafting the budgets and
  • Influencing the process of budgeting
  • Designing the Budgeting Process

Before the budgets can be drafted and communicated for the implementation of different departments, it is important to decide the manner in which the budgets can be determined, and the people that should be involved in the budgeting process. This becomes important as this forms the basis for studying the behavioral aspects involved therein. There are three common methods of setting the budgets in motion. These methods are:

  • Authoritarian Method – where a superior just dictates the budget standards to the subordinates to be followed by them
  • Participation Method – in which all the concerned people agree on the manner in which budgets can be set. Such decisions are reached by engaging in a joint meeting process
  • Consultation Method – where the managers instruct the subordinates to discuss and offer their suggestions about the drafting of various budgets. However, the final version of the budget is determined by the manager himself alone.

Influencing the Budgeting Process

Under circumstances where the incentives and compensation are linked to the performance standards fixed by the budgets, some of the managers might have the temptation to play budgeting games using which they attempt to manipulate information and targets. By doing such manipulation the managers try to achieve the best evaluation or very high bonus amounts. Usually, participation by the employees in the budgetary process provides them the opportunity to affect the levels and standards of their budgets in ways that would be detrimental to the interests of the organization. It may so happen that the subordinates might demand resources over and above required for accomplishing their budget objectives.

In view of the above, it has become critically important in the present day context these two areas in the budgetary process are thoroughly looked into to consider the behavioral impacts resulting from the individuals and their attitudes.

Behavioral Aspects of Budgetary Control Process

The budgeting process in any organization has been devised to perform the dual role of providing a forecast of its business plans and also a yardstick for measuring the performance of the management. Since the budget is used as a tool for effectively measuring managerial performance it can be said to be used as a tool for control. Further, if the performance is linked with an incentive for better performance or punishment for poor performance there will be a general tendency for the managers to distort the information being passed on to the superiors so that the unfavorable items are eliminated altogether or under-emphasized. Such distortion of information for personal benefits can be viewed as undesirable and counterproductive from the organizational perspective.


As per the traditional approach to budgeting, the human beings associated with an organization will always regard their work as burdensome and unpleasant. This would make them shirk their responsibilities and hence they would normally employ inefficient and wasteful methods of doing their works. Such conceptual thinking about human behavior had led to a different approach to the budgetary process which emphasized that human beings had to be provided with greater responsibilities and a great deal of pressure needed to be applied on them in order to make them realize such responsibilities and perform to achieve the desired results.


In any budgeting environment, there are chances of the budget being regarded as arbitrary. It may add suspicion to the people who are concerned with the budget. In order to make the budget more credible it is necessary that the following conditions are satisfied:

  • The standards of performance should be calculated scientifically by employing tools like work and motion study and other engineering studies.
  • The standards of performance need to be evaluated using a joint and participative process wherein all the operating personnel, administrative staff, and finance department staff are involved.

Conflicts and Sub-optimisation

In most organizations, the budgeting process normally leads to a narrow and department-oriented outlook. The concern for the departmental excellence in performance might result in inter-departmental conflicts which will be detrimental to the growth of the company. Especially in a system of responsible budgeting, the primary objective of the departmental head is to enhance the performance of the department. In order to ensure that his department or section shows a better performance, the production manager may resort to producing a product mix that may not actually conform to the requirements of the marketing manager. Another example to the point may be seen from the action of the credit manager not extending the credit facility to certain customers of the company in order to improve his performance over the collection period, though such action by the credit manager might result in the increased profitability of the company. There are many such instances in the budgeting process and this behavior may be referred to as sub-optimization.

Budget Slack

Jensen, (2003) on the basis of a study of the relationship between budget participation and budget slack argues that budget slack is nothing but the difference between the budget and the one that is necessary. Shields et al., (2000) define slack as the amount that the subordinates understate with respect to their production capacity while fixing the standards against which the performance of the subordinates will be evaluated. Therefore slack can be construed as the phenomenon that relates to the overstatement of expenses or understatement of revenues in a budgeting process. As it relates to the performance of the subordinates it can also be inferred that slack is subject to the influence of an individual or group of individuals. Van der Stede, 2000) on the study of the recent budgeting process, focused on the short-term orientation of the budget slack.

It is always advisable to allow the managers to use some amount of slack, as it provides them the elbow room to utilize it effectively to reduce the conflicts between the individual performance standards and the organizational performance.

Reward and Punishment

The budgetary control system has the best utility when used to reward the good performance of the managers and the subordinates and also when punishing the employees for their sub-optimal performance. There are different ways of rewarding good performance. When good performance is identified in the form of favorable variances, the employee may be rewarded by offering high monetary compensation, promotions, and advancement in the organizational hierarchy and also by officially recognizing the good work done.


Even though in the 21st-century context the budget standards are worked out to function as a measure of performance there can be certain estimations and expectations which might not have materialized. Therefore, while determining the rewards and punishments, the actual conditions that prevailed at the time of performance by the individuals should be considered in arriving at the levels of reward and punishment. The present-day organization should not place complete reliance on the budget standards for establishing the rewards and punishment levels for the subordinates. Complete adherence to such standards may make the managers become over-conscious at the time of budget preparation and may also make them indulge in actions that may prove detrimental to the growth of the business of the company in the light of actual conditions. It is necessary that the reward and punishment system must motivate the managers to behave in the best interests of the firm. The system should be such that it neither creates undue fear in the minds of the managers and subordinates nor disorient their initiative to make them act in a manner that will not be beneficial to the firm.


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