Behavioural Aspect Of Budgeting

Compiled by:

Tanmay gangwar 091202064

Pratham Hegde 091202073
Nayana 091202057
Shanawaz 091202115
Anamika Kanoi 091202047
 Contents

 Definition and process of budget

 Significance of budget

 Impact of budget on stakeholders

 Conflicting role of budgets

 Effect of budget levels on performance

 Reasons for bias in budgeting

 Bottlenecks of allocating budgets

 Conclusion
 Learning Objectives

• To understand human behavior and their aspiration in relation to budget.

• To study the impact of stringent budget on the stakeholders

• To understand the concepts and process of budget.

• To suggest measures to encourage the performance of people concerned

in relation to formulation of budget.
 What is Budget?
• ‘quantified plan relating to a given period’.

• Although Budgets are often stated in terms of money, they need not be,
and can also relate to quantities made and sold, numbers of employees to
be recruited, or weights of material to be consumed.

• Quantification is important because it adds precision and Clarity to a plan.

 PURPOSE OF BUDGETING

• Planning:
Necessitates setting of goals and establishing actions needed to
attain goals.

• Organising:
involves the allocation of resources.

• Leading:
Two main aspects are communicating & motivating.

• Controlling:
Process of setting standards, measuring current performance and
taking remedial action if needed.
The Budgeting Process
Step 1: Planning the Process

• Identify who will coordinate the budgeting process and which staff, board
members and committees need to be involved;

• Agree upon key definitions, assumptions and document formats;

• Set timelines and key deadlines;

• Determine and schedule any training or key meetings.

Step 2: Communicating about the Process

• Clearly communicate responsibilities, expectations and deadlines to

everyone involved;

• Explain and distribute forms and assumptions.

Step 3: Programmatic Goal Setting

• Determine program goals and objectives;

• Project staffing requirements and salary and benefit

assumptions based on program goals;

• Get board agreement on goals and assumptions.

Step 4: Information Gathering

• Research and gather information about income and expenses based on

program goals and assumptions;

• Construct budget details by program;

• Communicate regularly to avoid duplication of effort and to share

information and assumptions.
Step 5: Compilation and Revision

• Have one person compile all information, review it for

consistency and redistribute to everyone involved;

• Leave plenty of time for review and revisions.

Step 6: Committee Review

• Have the finance committee and other appropriate staff and

board committees review a budget draft and key
assumptions;
Step 7: Final Approval

• Board meeting held and budget proposal and programmatic

and fundraising assumptions are presented for approval.
Effects Of Budget On The Various Parties
Involved In An Organisation
 Stakeholders

 SUPPLIERS

• In case of a stringent budget the production department (stores and

purchases) is under heavy pressure to control and reduce the cost. Due to
this it tries to curtail on the raw material consumption or else tries to
resort to compromising on quality.

• The suppliers in this case may or may not agree to reduce cost which will
create issues regarding the budget.
 CUSTOMERS

• The customers are also affected because of the company`s

budget .

• If in case a stringent budget is prepared by the concerned

authorities, various aspects such as advertisement, awareness
, value added services, etc are not provided in the desirable
way to the customers which creates hassles for them.
• GOVERNMENT

• Due to stringent budget policies the company may strive to

cut down its tax liability which is unethical and would try to
reduce it to the extent possible.

• This might affect the government which is considered as one

of the stakeholders of the company
 INVESTORS

• Budget plays a very important role for the investors as their

expectations are linked to the overall performance of the
organisation .

• The increase in performance of the company leads to an

increase in its investor base thereby leading to an increase in
the value of the firm and its shares
 EMPLOYEES

• The employees are affected heavily if the budgets assigned to

them are strict in nature.

• This might lead to development of a negative attitude from

the employees which would further lead to the downfall of
the company
Conflicting Role Of
Budgets
• Tight budgets should be established to motivate maximum performance,
although this may mean that the budget will not be achieved.

• However, tight budgets that are unlikely to be achieved are most

unsuitable for cash budgeting and for harmonizing the company plans in
the form of a master budget.

• Because of this conflict separate budgets should be used for planning and
for motivational purposes.

• The counter argument to this is that budgetees may react unfavourably to

a situation where they believe that one budget is used to evaluate their
performance and a second looser budget is used by top management.

• It is unlikely that one set of budgets can, at the same time, meet both the
planning and the motivational requirements.
 Managerial Use budgets In Performance Evaluation

• Study conducted by Hopwood(1976)

• Three distinct styles of using budget were
recognized:
 budget-constrained style
Profit-conscious style
Non accounting style
 OBSERVATIONS $ FINDINGS
 Accounting data showed the performance on
a quantitative scale ignoring the long term
costs
 Both budget constrained style and profit
conscious style were better as compared to
non accounting style
 Profit conscious style concentrated on
attaining the budgets without incurring any
emotional or undesirable behaviour
 contd.
 Budget constrained style created worry and a
feeling of unjust among the employees
 Budget constrained style may at times involve
manipulation and mal practices being adopted
by the managers and their unit memebers and
there is a high focus on short term benefits
PARTICULARS BUDGET PROFIT CONSCIOUS NON ACCOUNTING
CONSTRAINED STYLE
STYLE

INVOLVEMENT HIGH HIGH LOW

WITH COSTS

JOB RELATED HIGH MEDIUM MEDIUM

TENSIONS

MANIPULATION OF EXTENSIVE LITTLE LITTLE

ACCOUNTING
INFORMATION

RELATION WITH POOR GOOD GOOD

SUPERIORS

RELATIONS WITH POOR GOOD GOOD

COLLEAGUES
 The Effect Of Budget Levels On aspiration level and
Performance.

• Hofstede’s Research(1968) provides an insight into the effect

of budget levels on the aspiration level and performance.
In case 1, the budget is too
loose (above N). The
budgetee will not find it
difficult and will set a
higher aspiration level. The
result R will be equal to the
aspiration level.
In case 2, the budget is
equal to N, and the
aspiration level and result
coincide with the budget;
the budget will not
influence performance
In case 3, the budget is
below N, and the
budgetee responds by
altering his aspiration
level to below N but not
to budgeted level of
expenditure. The actual
result will be equal to
aspiration level.
In case 4, here there is an
improvement in aspiration
level. But since the budget
and aspiration level, there is
a strong possibility that the
actual result will not be as
good as aspiration level. A
higher level of performance
is achieved here.
In case 5, the aspiration
level is easier than case
4.here the actual result
will be equal to the
aspiration level.
In case 6, the budget is so
tight that the budgetee will
regard it as impossible. The
effect of this approach is
that the actual result will
be worse than that which
would have been achieved
had no budget been set.

In case 1 and 6 budgets

do more harm than
good, and
improvements occur
only in case 3 and 4.
Hofstede’s conclusions concerning budget difficulty were as follows;

• Budgets have no motivational effect unless they are accepted by

the managers involved as their own personal targets

• Up to the point where the budget target is no longer accepted, the

more demanding the budget target the better results achieved.

• Demanding budgets are also seen as more relevant than less

difficult targets, but negative attitudes result if they are seen too
difficult.

• Acceptance of budgets is facilitated when good upward

communication exists.

• Manager’s reaction to budget targets was affected both by their

own personality and by more general cultural and organisational
norms.
Bottlenecks in Allocating Budgets
• Applying managerial motives of the firm theory, managers cannot obtain their
self-vested interest as well as those of the firm without a hefty budget to
implement acquisition and other diversification strategies. such mentioned
strategies require physical, financial and organizational resources.

• Departmental networks also often argue about appropriation of annual budgets

for their specific causes. 

• When budgets fail to meet expectations of such units, it may result to reduced
motivation and even firm rebellion particularly against the finance division. 
Example
• Applying performance budgeting to these instances can mitigate the destructive
speculation of excessive/ meager budget allocations. 

• Managers will be periodically audited in the post-expansion implementation.

• This budgeting system is result-oriented, it should be coupled with ethical

committee oversight to regulate unacceptable level of immorality to obtain
intended results.

• Allocation of the budget and selecting the appropriate model should be inferred in
firm specific aspects in order to identify motivational points.
 REWARDING EMPLOYEES ON A BUDGET

• Everyone likes to get a pat on the back for a job well done—especially if that pat
includes some type of bonus or other financial compensation or recognition before
colleagues.

• steps to design an effective employee rewards program:

• Identify what you want to reinforce
• Motivate your employees
• Make sure it works for the company
 Types of Rewards

• Opportunities
• Exposure
• Experience
• Praise
• Allow flexibility in an employee's schedule
 BIAS IN THE BUDGET PROCESS
REASON:
 THE REWARD SYSTEM OF THE COMPANY
 THE INFLUENCE OF THE COMPANY PRACTICES
 THE INSECURITY OF CERTAIN MANAGERS
 Conclusion
 Partial fulfillment of the set objectives.
 There is a significant relationship between
budget level ,aspiration level and performance
 Manipulations happen due to unimaginary
and unattainable targets.
 An organisation cannot serve both
motivational and planning aspects
simultaneously.
Thank you!!!!