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Unit 7: Budgeting: Tool for Management Control

being that budgetees do not “play games” with the budgeting system. The review prices Notes
should be perceived as being fair; the superior should change the budgeted amounts after
convincing the budgetee that such a change is reasonable.
Research shows that budget participation i.e., a process in which budgetee is both involved
in and has influence over the setting of budget amounts, has a positive effect on managerial
motivation for two reasons:
(i) There is likely to be greater acceptance of budget goals if they are perceived as being
under manager’s personal control rather than being imposed externally.
(ii) Participative budgeting results in effective information exchanges, between the
budgetees who are closest to the product/market environment, and the budget
department.
2. Degree of budget target difficulty: The ideal target is one that is challenging as well as
attainable i.e., in statistical terms, it may be interpreted that a manager who performs
reasonably well has at least a 50 percent chance of achieving the budgeted figures. There
are several reasons why senior management approves achievable budgets for business
units:
(i) If the budgeted target is too difficult, managers are motivated to take short-term
actions that may not be in the long-term interests of the company.
(ii) Achievable budget targets reduce the change of engaging in data manipulation (e.g.
inadequate provision for warranty claims, bad debts, inventory obsolescence and
the like).
(iii) If business unit profit budgets represent achievable targets, senior management can
share such information with security analysis shareholders and other external
agencies with a reasonable expectation of being correct.

(iv) When business unit managers are able to meet and exceed their targets, there is a
“winning atmosphere” and positive attitude within the company.
(v) Difficulty to attain profit budget also involves high sales target.

This results in over-commitment of resources. If actual sales levels do not reach the
optimistic targets, it is administratively and politically awkward to downsize operations.
One limitation of an achievable target is the possibility that business unit managers will
not put forth their best once the budget is met. This can be overcome by providing suitable
incentive by way of bonus payments.

Another limitation is that if the business unit manager has exceeded the profit figures, the
senior management should not automatically increase the profit budget for the following
year without proper review. Otherwise, business unit managers will not give their best.
3. Senior management involvement: Senior management involvement is necessary for any
budget system to be effective in motivating budgetees. Management must participate in
the review and approval of the budgets and the approval should not be a rubber stamp.
Management also must follow up on budget results. If there is no top management feedback
with respect to budget results, the budget system will not be effective in motivating the
budgetee.
4. Crucial role of budget dept: The budget department has a particularly difficult behavioural
problem in dealing with line managers on one hand as well as to ensure that budgets are
prepared properly and that information is accurate.

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