Professor Philip Dunn explains the behavioural aspects of budgetary control. Finance Staff together with Budget users need an awareness of how behaviour patterns are often shaped by the budgeting process, and why behavioural aspects are more to the fore in budgetary control than any other technique in management accounting.
CIMA’s definition of a budget is “a plan expressed in money. It is prepared and approved prior to the budget period and may show income expenditure and the capital to be employed. It may be drawn showing incremental effects on former budgeted or actual figures or complied by zero-base budgeting.”
Budgetary control is defined by CIMA as “the establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a basis for its revision”. The technique of budgetary control is an integral part of that area in managerial finance known as responsibility accounting. This recognises that control and responsibly are inseparably linked.
To facilitate control and responsibility in an organisation, responsibility centres are established. These are defined by CIMA as “a unit or function of an organisation headed by a manager having responsibility for its performance”.
There are three types of responsibility centre:
- cost of expense centre;
- profit centre; and
- investment centre.
In each, managers have specific responsibility for performance of their unit or units. Each centre is subject to planning and control and this achieved through people.
To coin a phrase used by Kaplan Financial: “Budgets have an impact on people and people have an impact on budgets.” The functions of budgetary control are:
- planning and coordination;
- authorising and delegating;
- communication and motivating;
- evaluation performance; and
The process is often seen as a source of conflict and managers may have differing perception of the nature and purpose of the technique. How, then, do the above functions and managers in achieving their objectives?
Planning provides a coordinated approach in the short term. A framework of responsibility is et; without this planning, managers’ objectives would be unclear. A coordinated approach to planning enables managers to have a wider perception of the organisation as a whole.
Authorising and delegating bestows power on people and may be interpreted by some as permission to ‘spend the budget’ rather than ‘spend up to the budget’.
Communicating and motivating are vital elements – an effective system of budgetary control will encourage and develop good communications within an organisation and aid management in performance enhancement. Budgets underpinned by sound planning technique should motivate individual managers towards achieving their objectives and those of the wider corporate plan.
Evaluating performance is achieved by timely presentation of results within the responsibility accounting framework, focusing on variance accounting. Management performance is thus judged on a timely and regular basis. Using exception techniques, managers can control the operations for which they are ultimately responsible.
Control simply focuses on operational control, defined by CIMA as “the management of daily activities in accordance with strategic and tactical plans”.
Researchers and writer on this subject agree there are three areas that often encounter problems:
- budget setting;
- budgets as targets; and
- budgets as performance indicators.
Budget setting is usually characterised as either ‘imposed’ or ‘participative’. In some organisations, setting budget is the sole responsibility of the senior management team. They communicate their plans to their subordinates using the ‘top-down’ process. Often, the managers responsible for implementing the plan have little or no participation in the budget-setting process and this can have an adverse effect on management attitudes and behaviour.
The opposite approach is one of full participation in the process, which can:
- lead to more realistic and achievable targets;
- improve coordination and communication across the organisation as a whole; and
- increase management commitment to objectives.
Budgetary targets must be set at acceptable and achievable levels so that managers are motivated to achieve their personal objectives, thus enhancing performance and contributing to the overall achievement of the corporate plans. Imposed budgets often set targets that are too difficult to hit: managers are discouraged by these unattainable standards and so become demotivated.
Performance evaluation provides feedback for ongoing managerial decisions. Such reporting needs to be timely and to possess the attributes of:
- comparability; and
All non-financial managers and Non-Executive Directors need training and development in the use and interpretation of Management Accounting Statements. As provides of financial information, it is our duty to assist in this process. For manager to be asses on their performance by the budgetary control and variance analysis procedure they need to understand and have confidence in the reports they receive – otherwise conflict will arise.
CIMA: Chartered Institute of Management Accountants