1. Introduction

This report will Draw upon the literature considering the human problems in preparing budgets and critically evaluate the important aspects. An explanation on what is a budget, what is its purpose is and the theory’s on behavioural aspects.

Banks and Giliberti (2003) states that the use of budgets is vital if the organisation is to correctly perform necessary management functions. Budgets aid in the planning process. When employed appropriately they facilitate communication and can act as a motivational tool. They are also used as a basis for control and performance measurement. The process of budgeting involves setting strategic goals and objectives and developing forecasts for revenues, costs, production, cash flows and other important factors (Bonner 2008).

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Weygandt (2009) explains that a budget is a formal written statement of managers plans for a specified future time period, expressed in financial terms. It normally represents the primary method of communicating agreed-upon objectives throughout the organisation. Once adopted, a budget becomes an important basis for evaluating performance. It promotes efficiency and serves as a deterrent to waste and inefficiency. Weygandt (2009) also highlights the benefits of budgeting in that:

1. It requires all levels of management to plan ahead

2. It creates an early warning system for potential problems so that management can make changes before things get out of hand

3. It facilitates coordination of activities within the business. (Correlating the goals of each segment with overall company objectives).

4. It results in greater management awareness of the entity’s overall operations.

5. It motivates personnel throughout the organisation to meet planned objectives.

Banks and Giliberti (2003) added that it is important for managers to develop attitudes and strategies that cultivate and maintain supportive and cooperative relationships with subordinates. Budgets must not only be used as a computational tool to control costs: the behavioural aspects must also be considered so that staff will be motivated enough to achieve the budget’s goals. This can only be done if staff have a sense of ownership of the budget.

2. Main body

There have been numerous studies on the human problems of producing budgets. A study as far back as 1953 by Chris Argyris is still relevant today and his studies identified that the budget pressure creates friction between the employees and management while putting the supervisor (or a person in similar position) under tension. Argysis explains that this tension can lead to inefficiency and poor performance of the supervisor. Furthermore, if top management continues to exert pressure for increased production or performance, this may lead to long term negative results. This may lead to the formation of groups against the management, and every move management makes it would be treated suspiciously. Secondly, Argyris suggests that finance staff may feel that success is only achievable by way of finding faults with the employees. This attitude can lead to having human relations problems as there are feelings of failure within the workplace. This can lead a supervisor to lose confidence and interest in their work, leading to poor performance. Finally, supervisors frequently use budgets as a way of expressing their own patterns of leadership. if this gets people hurt, the budget, which itself a neutral thing, will often get the blame.

Robinson (2007) and Rubin (2010) stated that motivation can be referred to as the fuel that drives employees to achieve strategic goals and the resultant force that influences action towards such goals. Obtaining goal congruence is essentially a behavioural issue. Involvement in the budgeting process is therefore of significant importance because budgets serve to motivate employees and managers by giving them a sense of purpose.

Hopwood (1973) explains that a budget represents a target, and aiming towards a target can be a powerful motivator. However, whether the target will actually cause employees to do better is

thought to depend on how difficult the target is perceived to be. Employees have different perceptions of targets, but generally:

1. If targets are very low, actual performance can be pulled down from where it might naturally have been.

2. If targets are habitually very high, then employees might give up and, again, performance can be reduced

3. If you know that no matter how hard you try you will fail to meet the target, it’s easy to conclude that you might as well not try at all. This can be seen in Appendix 1 as it displays a graph showing performance in relation do budget difficulty.

Chadwick (1998) highlights the behavioural implications that management need to be aware of when preparing budgets:

1. The budget may be used as a ‘whipping post’. i.e organisational problems resulting from comparisons being blamed on ‘the budget’. (as Argyris pointed out)

2. Some personnel may not be aware of the budget, or its purpose. This is why staff education is important.

3. Budgets are intended to affect human behaviour and that human behaviour cannot always be predicted. Thus the human element must always be taken into account and carefully monitored.

According to Maslow (1943), human being have a limited number of needs. These needs are arranged in a hierarchy (see appendix 3) and people will seek to satisfy their lower-order needs first before seeking to satisfy higher-order needs. Once a need has been satisfied it no longer acts as a motivator. Herzberg, et al (1959) argued that factors such as salary, job security and other working conditions did not motivate employees but a sense of achievement, responsibility and recognition within the work place does act as a motivator. Another major theory is the expectancy theory (see appendix 3), this theory has three main concepts: expectancy – the probability that a given level of effort will result in high performance. Valence – the utility or desirability of an outcome or reward such as salary increase, promotion. Instrumentality – the probability that high performance will lead to a salary increase or promotion.

3. Conclusion

From this literature, it is clear that budgets affect individuals work attitudes and their levels of performance. We can relate to Maslows hierarchy theory, even if it is over half a century old. Its needs to be satisfied are all relevant in today’s world and should be taught to top managers of any organisation to understand the needs of employees. However, this theory does not apply to everyone as the needs could be in different order (depending on the individual) and not everyone makes it to the top of the pyramid. Some aspects may be irrelevant as it was made in the 1940’s specific to America’s individualist culture where middle-class people worry about their personal needs rather than any collective needs. The expectancy theory is effective for explaining an individual’s decision making process however this theory does not take into account the emotional state of the individual.

This is a ‘perception’ based model and the manager needs to guess the motivational force (the value) of a reward for an employee. As everyone’s needs are different, this can prove ineffective to some employees. Budgets need to be seen to maintain supportive and cooperative relationships with staff and not to be the blame when problems arise. So participation in the budgetary process tends to result increased productivity and satisfaction. When managers set their budgets they need to choose how they are going to do it, whether it be a top down imposition or a bottom up participation. From literature found, setting the budget effectively is really important as managers need to consider how to get the employees to pay attention to the budget and take it seriously while relating to their needs and motivating them. Setting the target too high will de-motivate the employees while setting it too low will not push them for the best results possible. Finding the balance and understanding the employees is the key to a successful budget.

4. Bibliography

Argyris, C. (1953) Human Problems with Budgeting. Harvard Business Review

Argyris, C (1952). “The impact of Budgets on People” The Controllership Foundation, New York, School of Business and Public Administration.

Banks and Giliberti (2003) Behavioural aspects of budgeting. 2nd ed. McGraw-Hill Australia

Becker, S. and Green, D. (1962). “Budgeting and Employee Behaviour”. Journal of Business 35 (January): 392-402.

BEDDINGFIELD, R., 1969. Human Behavior: The Key to Success in Budgeting. Management Accounting (pre-1986), 51(3), pp. 54-54.

Bhar. B (1976) Cost Accounting. 5th ed. B.K Dhur Academic Publishers, Kolkata

Bonner, S (2008). Judgment and Decision Making in Accounting, Pearson Education Inc., Upper Saddle River, New Jersey.

Chadwick, L. (1998) Managent Accounting. Cengage Learning EMEA

Herzberg, F. Mausner, B. & Snyderman, B. (1959) The Motivation to Work. John Wiley. New York.

Hopwood, G. (1973). An Accounting System and Managerial Behaviour, Saxon House

Hopwood, A.G.(1976). Management Accounting and Human Behaviour. Prentice Hall

Kheng (2012) Behavioural aspects of budgeting. [Online]. Available at: http://accounting.e-video-lesson.com/index.php/accounting/acca/12-f5-performance-management/485-f5-behavioural-aspects-of-budgeting [Accessed at: 1st January 2013]

Lucey, T. (2003). Management Accounting. Cengage Learning EMEA

Maslow, A.H. (1943). A theory of human motivation. Psychological Review, 50(4), 370-96

Miller, F. (1951) Impact of budgets on people. New York: Controllership Foundation

Raghunandan, M. Ramgulam, N. Raghunandan-Mohammed, K. (2012) Examining the Behavioural Aspects of Budgeting with particular emphasis on Public Sector/Service Budgets. International Journal of Business and Social Science. Vol. 3 No. 14

Robinson, M (2007). Performance Budgeting: Linking Funding and Results, Palgrave Macmillan, New York.

Rubin, I. (2010). The Politics of Public Budgeting: Getting and spending, Borrowing and Balancing, 6th Edition, CQ Press, Washington, DC.

Schiff, M. Lewin, A.Y. (1970). The Impact of People on Budgets. Accounting Review, April, 259-268.

Vroom, V. H. (1964). Work and motivation. New York: Wiley

Weygandt, J. Kimmel, P. Kieso, D. (2009) Managerial Accounting: Tools for Business Decision Making. 5th ed. John Wiley & Sons


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