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    The behavioural Aspects of budgeting

    Critically evaluate the role of participation in budget setting, including any relevant theory.
    Explain what you understand by such dysfunctional behaviour in budgetary control mainly in the public sector. Should managers be involved in setting budgets.

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    Management styles:
    Likert: identified four management styles:

    1. Exploitative authoritative - fear/threats; communication downwards; strong hierarchy
    2. Benevolent authoritative - motivation by reward, communication downwards but still centralized decision making and strong hierarchy
    3. Consultative - motivation by reward, communication two way but still largely centralised decision making
    4. Participative - group participation with good communication and decision making by group processes.

    Likert postulated that with the participative style there is greater involvement for individuals, better labor relations and higher productivity.

    McGregor's identified a dichotomy in how workers are viewed:

    Theory X: inherent dislike of work, therefore most people must be coerced, controlled or threatened if they are to work; and avoid responsibility, no ambition and want security

    Theory Y - work natural, people will exercise self-direction and self-control in achieving objectives tom which they are committed, and individuals under proper leadership can accept/ seek responsibility.

    Management needs to attempt a participative in budgeting on the assumption that Theory Y holds:


    Coch and French - study of participative v non-participative budgets;

    Hofstede - positive correlation between higher participation and higher budget motivation; and

    Bass and Leavitt - employees participating in setting standards performed better than those who did not.


    Fieldler - suggests that styles of leadership other than participative can be perfectly effective.

    Argyris - danger of pseudo-participation

    Budget Motivation

    Anthony - Budgets may be seen as commitments by managers to achieve the targets set
    Hofstede - "budgets and cost standards act as incentives for motivating budgetees"

    But what motivates people:

    Maslow - hierarchy of needs from physiological (food, shelter etc); safety (job security, fair treatment), affiliation (social contacts), esteem (both self esteem and from others) and finally self actualization (doing what one is fitted for) - widely tested and confirmed.

    McClelland - two major needs:

    Achievement - identifiable with one's own efforts

    Power - over others and against unnecessary restraints on your own freedom of action
    Categorised people into high and low achievers and noted the drive of the former to be challenged and to be innovative

    Overall impact on budgeting
    1. Maslow - stress those factors at the apex of the hierarchy of needs (self actualisation and esteem as their basic needs will have been met.
    2. Herzberg - ensure that hygiene factors are adequate and focus on providing the motivating factors
    3. McClelland - set budget at a challenging level and focus on factors within the manager's control
    4. Contradictory messages on the link between performance and pay - Herzberg suggest salary is a hygiene factor but in Maslow there may be a link to esteem
    5. Maslow's affiliation needs may be met by budget holders grouping together to resist budget pressures from senior management especially in authoritarian settings
    6. Maslow's esteem needs, and Herzberg's recognition and achievement aims are relevant because they indicate that managers wish to succeed and to be seen to succeed
    7. Herzberg's identification of responsibility as a motivator of managers links with the need for participation.

    Other motivational theorists

    Vroom expressed "motivation to perform an act" as a function of "orientation" and "expectancy" - in terms of budgetary control this means that the desire to achieve a budget target is a function of the preference for obtaining the result over not attaining it and perception of your ability to influence the outcome.

    Becker and Green and Stedry linked aspiration levels of employees with performance. Stedry showed that the best results were achieved by those with the highest aspiration levels - thus we may say "budgets should be attainable but not too tight". Kay and Stedry looked at the effect of different aspiration levels by setting goals at the normal level (50% likelihood of success) and a difficult level (25% likelihood of success). The difficult level produced the best and worst outcomes - good outcomes were where the budgetee saw the target as a challenge and bad outcomes where the target was deemed impossible and the budgetee withdrew. Good performance was also linked with high achievers and younger people.

    Child and Whiting noted:
    • success raises the level of aspiration and failure the reverse
    • the stronger the success , the greater is the probability of a rise in the level of aspiration and vice versa for failure
    • changes in aspiration levels are a function of changes in the subjects ability to attain goals
    • effects of failure are more varied than those of success and may lead to withdrawal through the avoidance of setting of aspiration levels

    Hofstede noted
    • budgets have no motivational effect unless they are accepted by managers as their own personal targets
    • up to the point where the budget is no longer accepted, the more demanding the budget the better, as demanding budgets are seen as more relevant
    • tight standards (assume near perfect conditions) are the most difficult standards to achieve and are perceived as being unrealistic by individuals and this results in poorer performance than could have been obtained by less challenging targets
    • loose targets will be achieved but will not motivate individuals to achieve their best
    • the optimum is a currently attainable level as this is tight enough to motivate but perceived as realistic and within this context, performance is improved by:
    • participation in the setting of the budget
    • frequent communication about cost and budget variances
    • clear definition of responsibility for the budget lines
    • good upward communication with frequent group meetings with the boss and subordinates
    • realisation that managers' reaction to budget targets were affected both by their personality (some hated them) and by more general cultural and organisational norms

    • Otley suggests that the optimum point for setting a budget from a motivational viewpoint is where there is significantly less than a 50% chance of success
    • this could be disastrous if budgets are used for planning eg. cash budgeting and therefore there is a case for different budgets for planning and motivation but participants may react badly to this and perceive being set higher targets than the budget as unfair
    • highly achievable budgets do not maximise aspiration levels or performance
    • highly achievable budgets (Merchant suggests 80-90% hit rate) still require effort and overcome the impact of the negative effects of failure leading to discouragement and depression which can themselves be costly
    • highly achievable budgets give a sense of achievement and raise self-esteem which can increase levels of commitment and aspirations
    • highly achievable budgets shield managers from adverse circumstance
    • highly achievable budgets, if linked to reward, promotions and job security, reduce the chance of the distortion of results by the manipulation of data or deliberately under-performing to prevent targets being raised in future periods

    Budget Biasing

    • Lowe and Shaw showed that with participation in fixing budget targets came a tendency for budgetees to bias information in their own interests and generally agree lower rather than higher budget standards.
    • Similarly, Schiff and Lewin observed a tendency for managers in a participatory budget environment to bias budget costs upwards and revenues downwards. As Lowe pointed out there is a balance for the budgetee of the benefits from achieving a target by negotiating down the target and disappointing his superior with the size of the present forecast. Lowe also indicates that the goodwill based on past performance is important - if there is none the employee has little to lose by setting high targets to gain present acceptance but if the is a good record forecasts may be tempered with a view to maintaining the record.

    Budget Communication

    Miles and Vergin summarised the following precepts:

    • Standards must be established in such a way that are recognised as legitimate
    • Individuals must have some voice or influence in the establishment of his own performance goals
    • Standards must be set in such a way that there ...

    Solution Summary

    This problem involves the fundamentals of accounting.