Hansen, Van Der Stede - 2004 - Multiple Facets of Budgeting An Exploratory Analysis

Management Accounting Research 15 (2004) 415439
Multiple facets of budgeting: an exploratory analysis

Stephen C. Hansena , Wim A. Van der Stedeb,
a
School of Business and Public Management, George Washington University, Washington, DC 20052, USA
b
Leventhal School of Accounting, University of Southern California, Los Angeles, CA 90089-0441, USA
Received 8 September 2003; accepted 16 August 2004
Abstract
This paper investigates four potential reasons for budgeting in organizations (operational planning, performance
evaluation, communication of goals, and strategy formation), their antecedents (e.g., organizational strategy and
structure), and several budgeting characteristics (e.g., target difficulty and budget emphasis) that potentially influence
these reasons-to-budgets performance. While the idea of multiple uses of budgets in organizations is not new, the
rationale for this study is that prior research has tended to look at the same (one) reason for budgeting (primarily
performance evaluation), or at only one reason in isolation. Based on survey data from 57 managers responsible for
preparing the budget for their organizational unit, our analyses suggest that while the four reasons-to-budget exhibit
overlap, they are also substantively unique in their own use. Moreover, we demonstrate that the reasons-to-budget
arise in different circumstances and that each reason-to-budgets performance is associated with different budgeting
characteristics. We also demonstrate a link between the performance of the individual reasons-to-budget and overall
budget satisfaction and organizational unit performance.
2004 Elsevier Ltd. All rights reserved.
Keywords: Budgeting; Planning; Management control; Performance evaluation
1. Introduction and overview
Budgeting is an important control system in almost all organizations (Armstrong et al., 1996; Ekholm
and Wallin, 2000; Merchant and Van der Stede, 2003) and there continues to be an extensive amount of
work devoted to understanding how it works. Most prior studies, however, have focused on the alleged

Corresponding author. Tel.: +1 213 740 3583; fax: +1 213 747 2815.
E-mail addresses: shansen@gwu.edu (S.C. Hansen), wim@marshall.usc.edu (W.A. Van der Stede).
1044-5005/$ see front matter 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.mar.2004.08.001
416 S.C. Hansen, W.A.Van der Stede / Management Accounting Research 15 (2004) 415439
dysfunctional consequences of budgetary controls in the context of budget use for performance evaluation
(Hartmann, 2000; Hope and Fraser, 1997, 2000, 2003; Jensen, 2001; Marcino, 2000; Schmidt, 1992),
but there has been considerably less focus on other budget uses in organizations, such as for operational
planning and strategy formation. These neglected budget uses are important, as many of the recent calls for
improving traditional budgeting processes focus on their lack of connection with strategic and operational
planning (Hansen et al., 2003). Moreover, while the idea of the existence of multiple uses of budgets is
not new and has been discussed in standard textbooks (e.g., Garrison and Noreen, 2003; Horngren et al.,
2003), prior research has tended to look at the same (one) reason for budgeting (primarily performance
evaluation) in isolation. It is not clear, however, that when an organization budgets to plan operations, it
takes the same approach (e.g., with respect to budget target difficulty) or considers the same circumstances
(e.g., with respect to uncontrollable factors in the environment) than when it budgets to collect strategic
information or to evaluate managers or their units performances.
We extend prior work by examining an expanded set of reasons-to-budget and explore the drivers of the
importance and performance of budgeting for each of these reasons. Specifically, we concentrate on four
potentially different reasons organizations budget, two of which are primarily short-term and operational
in nature (operational planning and performance evaluation), while the other two are essentially long-
term and strategic in nature (communication of goals and strategy formation). Our investigation uses data
from a survey of participants in the Consortium for Advanced Manufacturing-International (CAM-I). We
obtained responses from 57 managers responsible for preparing the budget for their organizational unit.
We proceed in four stages to analyze the importance and performance of these four reasons-to-budget,
as well as their antecedents.
In the first stage, we extract each of the four reasons-to-budgets uniqueness vis-`a-vis the other three
reasons-to-budget. Prior work suggests that the reasons organizations use budgets are not determined in
isolation of one another (e.g., Moores and Yuen, 2001), and thus, suggests that reasons-to-budget are
likely to be correlated or exhibit overlap (Shields and Shields, 1998). Instead of concentrating on the
common factor among the various reasons-to-budget, which is the usual approach in prior work, we
remove the common factor from each reason-to-budget and focus on its unique element. Extracting
the unique element for each reason-to-budget is important because our objective is to understand how
organizations consider various budgeting characteristics (e.g., with respect to budget target difficulty)
and various contextual factors (e.g., with respect to uncontrollable factors in the environment) when
using budgets for different reasons. We find that although the four reasons-to-budget are correlated,
each reason-to-budget is also sufficiently unique to warrant analysis by itself. In order to focus on the
uniqueness associated with each reason, we use the residual from regressing each reason-to-budget on
the other three as the key variable in the subsequent analyses.
In the second stage, we investigate the underlying antecedents, or drivers, for each reason-to-budget
(residual).1 Our analysis suggests that each reason-to-budget is associated with a relatively different set
of antecedents; that is, while most antecedents are significant in at least one reason-to-budget, none
are significant in more than three. This reinforces the idea that the reasons-to-budget arise in different
circumstances. In addition, the signs of the coefficients for some of the antecedents reverse across reasons-
to-budget. For example, we find that the use of budgets for communication of goals and strategy formation
is more prevalent when competition is higher, but competition appears to inhibit the use of budgets
1
We use the term antecedents (or drivers) loosely, merely pointing at the existence of a relationship between the antecedents
and the reasons-to-budget rather than implying causality or determinism (Luft and Shields, 2003, p. 173).
S.C. Hansen, W.A.Van der Stede / Management Accounting Research 15 (2004) 415439 417
for performance evaluation. These results suggest that the reasons-to-budget arise not only in different
circumstances, but also require organizations to make tradeoffs among various budget uses given the
circumstances they face.
In the third stage, we examine how well organizations perform in using budgets for each reason; that
is, how effective the use of each reason-to-budget is perceived to be, as shown in the following figure.
We use two-stage least squares (2SLS) to estimate the effect of budgeting characteristics jointly with
the importance of each reason-to-budget and its antecedents on the performance of each reason.2 This
2SLS design choice recognizes that both the reason-to-budgets importance and its antecedents are en-
dogenous to the reason-to-budgets performance. For example, it recognizes that differentiation strategy
(an antecedent) is unlikely to drive the use of budgets for strategy formation (one of the reasons-to-budget)
independent of choices about target difficulty and target participation (budgeting characteristics).
Using this approach, our analysis of the performance of the reasons-to-budget generates a similar
finding as the antecedent analysis: the performance of the various reasons-to-budget is associated with
relatively different budgeting characteristics (such as choice of target difficulty, amount of participation in
the budgeting process, and amount of emphasis on meeting budget targets). And there are again instances
where the sign of the predictors of reason-to-budget performance reverse across different reasons-to-
budget. For example, while the use of rolling budgets appears to enhance the performance of budgets for
operational planning, it also appears to inhibit the performance of budgets for performance evaluation.
These results again suggest that the drivers of reason-to-budget performance are not always compatible
across reasons-to-budget.
In the final stage of our analysis, we investigate how each reason-to-budgets performance affects two
organizational outcomes: overall budget satisfaction and organizational unit performance. The results
show that the reason-to-budget performance on operational planning, performance evaluation, communi-
cation of goals, and strategy formation is positively associated with overall budget satisfaction. However,
only the performance on three of these reasons-to-budget (operational planning, performance evalua-
tion, and strategy formation) is positively associated with organizational unit performance. These results
suggest that some, but not all, budget uses affect organizational unit performance.
In sum, our study provides evidence that budgets play different roles in organizations, and that differ-
ent reasons-to-budget have different antecedents that influence each reason-to-budgets performance in
different ways. These results arise in light of two important design choices underlying our analyses: first,
we focus on each reason-to-budgets unique element, and second, we handle the relationship between
the antecedents, importance, and performance of each reason-to-budget as a system using 2SLS.
The paper proceeds as follows. Section 2 describes how we chose the list of reasons-to-budget. Section
3 discusses the measures and the survey data collection process. Section 4 presents the analysis of the
2
Ideally, we would like to explore a path model that examines the antecedents leading into the various reasons why orga-
nizations budget, and then into the performance of these reasons-to-budget, and ultimately including a test of how the various
reasons jointly affect organizational performance. However, data limitations make the choice of path analysis inappropriate.
reasons-to-budget, the antecedents of the importance and performance of the reasons-to-budget, and shows
how the individual reasons-to-budget affect two organizational outcomes. The final section concludes,
discusses the limitations of this study, and provides suggestions for future research.
2. The basic framework
2.1. The reasons-to-budget
The starting point for our analysis is to generate a list of the potential reasons for which organizations use
budgets. The idea of multiple uses of budgets in organizations is not new, and there are many potential
sources to generate a list of reasons-to-budget: management accounting and control textbooks (e.g.,
Anthony and Govindarajan, 1998; Horngren et al., 2003; Merchant and Van der Stede, 2003; Simons,
1995), academic research (e.g., Collins et al., 1997; Ekholm and Wallin, 2000; Epstein and Manzoni,
2002; Fisher et al., 2002; Luft and Shields, 2003; Shields and Shields, 1998), and practice (Barrett and
Fraser, 1977; Hope and Fraser, 1997, 2000, 2003). Each source creates a slightly different list, and it is
difficult to determine the best list.3
After comparing all the various possibilities, we felt that the most defensible approach to generate
a list of reasons-to-budget is to involve practitioners. The benefit of this approach is that it does not,
a priori, exclude any potential reason from being stated. After several rounds of suggestions from 11
business people from the CAM-I and two academics, we honed down on the following four reasons-
to-budget: (1) operational planning, (2) performance evaluation, (3) communication of goals, and (4)
strategy formation.4
3
Budgets have been touted to be instrumental for a variety of purposes, such as performance evaluation, strategy implementa-
tion, and strategy formation, just to name the bare minimum. However, different sources use different labels and categories. When
discussing planning in a budgeting context, most authors mean operational planning, not strategic planning (e.g., Horngren
et al., 2003). Simons (1995), however, refers to this use of budgets as prot plans, while recognizing that profit plans (bud-
gets) can contribute to long-term, strategic planning, thus strategy formation rather than merely strategy implementation. Other
authors view budgetary control as synonymous with strategy implementation (Merchant and Van der Stede, 2003), while yet
others list strategy implementation and control and evaluation as two distinct roles of budgets (Ekholm and Wallin, 2000, p.
530). Moreover, some view planning (unspecified as either short- or long-term, operational or strategic), resource allocation,
and coordination as separate budgeting functions (Epstein and Manzoni, 2002), while others view resource allocation as part of
operational planning and then distinguish either or both coordination and communication as yet different roles of budgets (e.g.,
Horngren et al., 2003). Some do not specify the boundaries of coordination, although they commonly restrict it to operations,
functions, or departments within firms, while others include coordination across companies, such as with suppliers and customers
(Horngren et al., 2003). Similarly, some distinguish performance evaluation, motivation, and even empowerment (Ekholm and
Wallin, 2000, p. 530), while others group them all together as (performance) evaluation/measurement/control and motivation
(e.g., Hope and Fraser, 1997, p. 22). Finally, some lists use categories that are unique to their study, such as the role of budgets
for cost control/management (e.g., Barrett and Fraser, 1977; Hope and Fraser, 1997).
4
From the sources mentioned in footnote 3, we culled an initial list of four reasons why organizations budget: (1) planning;
(2) communication of goals; (3) coordination and information sharing; and (4) motivation and performance evaluation. We
then submitted the initial list to the scrutiny of two faculty colleagues and the 11 members of the CAM-I ABPB Group, who
suggested the following changes (E-mails followed by a conference call to discuss the proposed changes and converge on a
common list). First, they felt that planning was too generic and should be separated in operational and strategic planning. Second,
they felt that coordination and information sharing was too vague. Coordination relates to planning and information sharing to
communication. These comments gave rise to the revised four reasons-to-budget, as they appeared to be the most representative
of the various reasons mentioned by the practitioners as well as the most-commonly discussed reasons-to-budget in the literature.
Given the central role of the reasons-to-budget in our study, this list warrants further discussion. Our list
of reasons-to-budget is primarily practice-dened, which makes it more likely to capture a management
accounting phenomenon (i.e., the use of budgets) that practitioners wish to understand in their own
language. A common disadvantage of practice-defined variables, and thus an advantage of theory-dened
variables, is that the latter are more likely to have well-defined, stable, unitary meanings (Luft and Shields,
2003). Although this advantage generally applies, our literature review illustrates that there is no such
well-defined, stable, unitary meaning in prior work regarding the different uses of budgets (see footnote
3). Each of the authors uses slightly different terms, some coin their own terms, and thus, a unifying, and
generally agreed-upon framework does not exist.
Our survey pre-testers found that this list covers the main uses of the budget in most organiza-
tions. It covers the planning functionboth short-term (operational planning) and long-term (strategy
formation)as well as the role of communicating those plans (communication of goals). And, finally,
it covers performance evaluation; an important role of budgets recognized both in practice as well as
academic research (Hartmann, 2000; Luft and Shields, 2003).5
There is a caveat to our approach, however. Our observation that no well-defined, stable, unitary
meanings of the different reasons-to-budget could be derived from the literature is indicative that our
practice-defined reasons-to-budget also are likely to be ambiguous. There is no guarantee that our survey
respondents understood each of the coined reasons-to-budget in exactly the same way with exactly
the same meaning. Each of the four reasons-to-budget, as well as their importance and performance,
represents complex organizational phenomena that are difficult to define and measure with a survey
instrument. However, given that our list of reasons-to-budget was established through the involvement of
practitioners who are knowledgeable in the topic area and are from the same organization as our survey
respondents (CAM-I) should mitigate this problem.
The prior literature typically has not tested the existence of different reasons-to-budget, although
some authors have implied or claimed that a given budgetary control system cannot serve multiple
purposes (e.g., planning versus performance evaluation) equally well (Barrett and Fraser, 1977; Churchill,
1984; Epstein and Manzoni, 2002; Merchant and Manzoni, 1989). By implication, different purposes
of budgetary control systems cannot be the same if they are in conflict. In contrast to the studies that
suggest that different reasons-to-budget conflict, the experimental analysis of Fisher et al. (2002) suggests
that there can be positive externalities when the budget is simultaneously used for different purposes;
that is, the combination of budgeting reasons can create more value than the individual reasons used
separately. Rather than adhering to one view over another a priori, we take an empirical approach towards
investigating the possible existence of conflicts or synergies between the various reasons-to-budget.
Our expectation based on the above-mentioned literature, however, is that the various reasons are unlikely
5
Although our list of reasons-to-budget is practice-defined and has roots in the academic literature, we do not maintain
that it is exhaustive. For example, the practitioners also mentioned other potential budget uses, such as for benchmarking. One
practitioner, particularly, felt that the budget offers a unique basis for benchmarking because the budget in most organizations
is possibly the most comprehensive financial summary of an organizations operations that can be compared with the limited,
mostly financial, information disclosed by competitors (or other benchmark targets). One academic also raised the possibility
that budgets in some organizations are used ritualistically; that is, budgeting is done repeatedly because it has been done before,
maybe without any instrumental, but with only symbolic, value. Moreover, our sponsor restricted the survey to people who
directly prepared the budget for an organizational unit, not people who merely consolidate the budget in the corporate control
or finance office. Hence, our list does not include several reasons why corporate controllers may find the budget useful, such as
for resource allocation or authorization to spend.
to be neither totally independent nor identical. All that is required for our study is that the reasons-to-
budget are empirically sufficiently unique.
2.2. Antecedents of the reasons-to-budget
The second stage of our framework examines the relationship between the reasons-to-budget and
features of the organizational setting. It investigates the origins of why organizations use budgets for a
specific reason.
Based on a review of the literature, our analysis includes variables that capture the influence on the
reasons-to-budget from the external environment (degree of competitionKhandwalla, 1972), as well
as from the operating environment such as production/task and resource flow characteristics (Bouwens
and Abernethy, 2000; Eisenhardt, 1985; Gordon and Narayanan, 1984; Govindarajan and Fisher, 1990;
Krumweide, 1998; Macintosh and Daft, 1987; Ouchi, 1979; Pitts, 1980; Thompson, 1967). We also include
a measure of organization strategy (Collins et al., 1997; Govindarajan and Gupta, 1985; Govindarajan,
1988), structure (Bruns and Waterhouse, 1975; Goold, 1991; Gordon and Narayanan, 1984; Ouchi, 1977;
Vancil, 1980), and size (Bruns and Waterhouse, 1975; Merchant, 1981). We defer detailed descriptions
of the precise measures of these antecedents to Section 3.
While there is some guidance from prior work as to how each of these antecedents may affect some
of the reasons-to-budget, particularly performance evaluation (see Luft and Shields (2003) for the most
recent and most extensive review), there is less guidance as to how they may affect the other reasons-to-
budget. Moreover, expanding the list of reasons-to-budget to four, and investigating the effects of seven
antecedents on each of them, gives rise to a large number of potential inter-relationships. For these two
reasons (but lack of guidance from prior work being the most important), we refrain from formulating
explicit hypotheses for each possible node. Instead, our research is exploratory and aims to empirically
discern the inter-relationships. Our general expectation, however, is that each antecedent will be significant
in at least one reason-to-budget regression.
2.3. Reason-to-budget performance
The third stage of our framework examines the organizations performance for each reason-to-budget.
While the prior step examined the antecedents that generate the demand for each reason-to-budget, this
step investigates how well the budget performs for each of the reasons-to-budget.
As with the antecedents, generating a reasonably comprehensive list of potential budgeting charac-
teristics that may affect the perceived reason-to-budget performance is important. Our list again draws
upon prior work to generate these variables. An extensive literature on the use of budgets for performance
evaluation has maintained that such variables as the degree of budget emphasis (Hopwood, 1972; Otley,
1978; Van der Stede, 2000, 2001), budget participation (see Brownell (1982) and Shields and Shields
(1998) for extensive reviews), and budget target difficulty (Dunk, 1993; Epstein and Manzoni, 2002; Hirst
and Lowy, 1990; Kenis, 1979; Merchant and Manzoni, 1989; Simons, 1988) are likely to affect budget
outcomes or performance. For instance, the managers beliefs about the pressure to meet budget targets
may affect their desire to report truthful information in the budgeting process (Argyris, 1952; Hofstede,
1967), and hence, the effectiveness with which the budget potentially achieves its intended objectives in
each of the reasons-to-budget.
We supplement this set of oft-studied variables with variables that have been discussed less extensively
in the literature, particularly, the number of iterations it takes to complete the budget, whether or not the
unit uses a rolling budget (Ekholm and Wallin, 2000), and the extent to which the budget interfaces with the
units strategy. These variables are nonetheless likely to affect the perceived reason-to-budget performance
also, expecting that, for example, lengthy budgeting processes might be perceived as ill-performing, at
least for some reasons-to-budget (e.g., performance evaluation), but maybe not for other reasons (e.g.,
strategy formation) where the process of information gathering and learning is more important than budget
completion per se (Simons, 1987b, 1990, 1995). We provide detailed descriptions of the precise questions
and variables in Section 3.
The reason-to-budget performance analysis adds an additional six explanatory variables to our analysis.
As before, rather than formulating explicit hypotheses for each possible inter-relationship, we employ
an exploratory approach to discern which budgeting characteristics potentially affect the performance of
each of the four reasons-to-budget. However, we again expect that each budgeting characteristic will be
significant in at least one reason-to-budget performance regression.
Most of the variables discussed in the preceding sections appear on the list (sometimes with varying
names and labels) of the currently most extensive review of the management accounting literature (Luft
and Shields, 2003). However, because our over-arching objective is to explore the drivers of performance
on various reasons-to-budget, our selection of measures was also guided by recent claims why they do not
work well (e.g., they require too many iterations and take too long to complete) and suggestions for how
to fix the budgeting process (Hope and Fraser, 1997, 2000, 2003; Ekholm and Wallin, 2000; Jensen, 2001;
Marcino, 2000; Schmidt, 1992). Proposed improvements to fix the budgeting process include allowing
more frequent budget revisions and updating so that some system of re-budgeting or rolling budgets is
constructed (Serwen, 2002), as well as decreasing the emphasis on meeting budget targets for performance
evaluation (Hansen et al., 2003).
3. Survey, data, and measures
3.1. Data collection
We conducted the survey as part of a joint study with the Consortium for Advanced Manufacturing
International (CAM-I) that investigates current budgeting practices. Respondents are (1) members of
CAM-I or participants in a previous CAM-I quarterly meeting, and (2) managers responsible for preparing
the budget for their organizational unit. Applying both criteria resulted in 309 target respondents in the
U.S. for whom we had a current address for a personalized mailing. There was only one target respondent
per site. We received 65 replies, eight of which were unusable for a range of reasons, leaving a usable
sample of 57. Our total (usable) response rate is 21 (18) percent.6
6
We mailed the survey on February 12, 2001; the first follow-up (reminder letter only) on February 28; and a second follow-up
including a replacement survey on March 15. Of the 65 replies, we received 16 without follow-up (25%), 22 after the first follow-
up (34%), and 27 after the second follow-up (41%). The eight unusable replies were either partially incomplete or uncompleted
for the following reasons: addressee retired (1 respondent); addressee request to be removed from the mailing list (3); addressee
not in appropriate position and/or able to respond (3); and firm policy of non-participation in surveys (1).
3.2. Measures
Our presentation of measures logically splits into the four distinct parts shown in Table 1, Panels AD.
Panel A contains the main dependent variables for our analysis with regards to (1) the importance of the
four reasons-to-budget, and (2) the perceived performance of each reason-to-budget. Panel B presents the
antecedents of the reasons-to-budget, and Panel C the budgeting characteristics (additional independent
variables) for the reason-to-budget performance analysis. Finally, Panel D shows the measures for overall
budget satisfaction and organizational unit performance.
Several technical details are important in understanding our measures and the way we present them
in Table 1. When multiple items are combined into a composite scale, the individual items that went
into the composite scale are listed underneath the composite measure in the tables. We also report the
inter-item correlations among these items. These inter-item correlations are one piece of evidence of
both the validity and reliability of the composite scale, as factor analysis is more likely to hold items
together that have higher inter-item correlations, and scales based on items with higher inter-item cor-
relations also tend to have higher Cronbach Alphas, which we report in the tables for such multi-item
scales.7
In addition to multi-item scales, we also use several single-item measures, particularly for variables
that we felt would be most easily understood by the respondents. For example, we believe that respondents
understand quite well with just one question what is meant when asked whether they use rolling budgets
or when asked to report the number of budget iterations needed to complete the budget.
3.2.1. Reason-to-budget importance and reason-to-budget performance

We discussed the origin of the list of reasons-to-budget in Section 2.1. Table 1, Panel A, shows the
precise statement of the questions. The questions have two components: they ask about (1) the importance
of each reason-to-budget, as well as (2) the organizations performance on these budget reasons.
3.2.2. The antecedents of the reasons-to-budget

Panel B of Table 1 shows our measures for the characteristics of organizational structure and strategy,
the operating and external environment, and one control variable (size).
3.2.2.1. Organization structure. This variable is a simple indicator variable of whether the organizational
unit has a functional, divisional, or matrix (or other) structure.
3.2.2.2. Organization strategy. Following Porters (1980) strategy typology, we operationalize strategy
as an emphasis on product differentiation or cost leadership.8
7
We performed several factor analyses on all the relevant groupings of items in the survey, and then again on specific scales
subsequent to the initial overall factor analysis. The latter factor analysis on individual scales always kept the listed items as
reported in Table 1 together on one factor. Hence, rather than reporting factor loadings, which are not particularly informative
given that the items load on one factor anyway, we chose to report the items inter-item correlations, which are more insightful
about the relationships among the items that went into the composite scale.
8
We also asked the respondents to indicate their units emphasis on each strategy on a 0100 scale. The differentiation
strategy construct (DF STRAT) is positively and significantly related with the amount of emphasis placed on differentiation (r =
0.53, p < 0.01). Prior studies that have used similar measures of organizational strategy include Govindarajan and Fisher (1990),
Krumweide (2000), and Van der Stede (2000).
Table 1 (Continued )
Table 1 (Continued )
3.2.2.3. Operating environment. We use three scales to measure the characteristics of the units operating
environment.9 First, we use a measure of the production/task type from Krumweide (1998), which captures
the continuum from job shop to continuous flow production (Table 2). Second, we use the production/task
interdependence measure from Macintosh and Daft (1987), which captures whether the production/task
process is independent, sequential, or reciprocal (see Bouwens and Abernethy (2000) for a recent adoption,
and Van de Ven et al. (1976) for the original measure). Finally, resource traceability captures the extent
to which resources can be traced to the main products/services and production/service processes. This
measure is more comprehensive, and more representative of our setting, than prior measures that primarily
9
Our respondents are from manufacturing, service, and government organizations. Therefore we modified the standard
manufacturing process questions to address all three settings. We use the term production/task process to reflect the sequence
of steps necessary to accomplish the units operational goals. Specifically, we define the term product as the major output of the
respondents unit (products or services) and the term production process as the way in which they create their units output.
Table 2
Sample firm and respondent demographics (overall N = 57)
1. Respondent characteristics Minimum Maximum Mean S.D.
1.1. Respondent tenure in firm (N = 56) 1 year 28 years 10 years 7.66
1.2. Number of years responsible for preparing the 1 year 20 years 5 years 4.41
budget of your unit (N = 57)
2. Overall firm characteristics
2.1. Public/private/government (N = 56) Public Private Government
26 (47%) 22 (39%) 8 (14%)
2.2. Organization structure [ORG STRUCTURE] 28 (49%) 9 (16%) 20 (35%)
(N = 56)
28 (49%) 9 (16%) 20 (35%)
2.3. Manufacturing/service (N = 57) Manufacturing Service
37 (65%) 20 (35%)
3. Production/task type [PT TYPE] (N = 52) Job-shop Batch flow Paced flow Continuous
14 (27%) 12 (23%) 3 (6%) 23 (44%)
4. Size indicators Minimum Maximum Mean S.D.
4.1. Full-time employees in unit (N = 56) 7 38,000 4045 8966
4.2. Annual sales for unit (millions) (N = 33) 0 12,000 1003 2278
4.3. Annual sales for firm (millions) (N = 34) 1.900 32,000 5400 8242
4.4. Annual budget for unit (millions) (N = 35) 0.865 1200 665 2074
5. Use of rolling budgets [BU ROLLING] (N = 57) YES: 13 (23%) NO: 44 (77%)
If YES, rolling time horizon (N = 13) 1 month 2 (15%)
3 months 8 (62%)
6 months 3 (23%)
6. Budget completion on time (N = 57) YES: 45 (79%) NO: 12 (21%)
If NO, weeks overdue (N = 12) Minimum Maximum Mean S.D.
1 6 3.54 1.45
and exclusively focused on the degree of resource sharing across organizational units (e.g., Govindarajan
and Fisher, 1990).
3.2.2.4. External environment. Most prior studies use a measure of the uncertainty (predictability, sta-
bility) in an organizations economic and competitive environment at-large (e.g., Gordon and Narayanan,
1984). We use a more focused competition measure containing three items, which assess the degree of
competition for the units main products/services, employees, and inputs.
3.2.2.5. Control variable. We control for size using the log of the number of employees.
3.2.3. Budgeting characteristics

Table 1, Panel C, shows our measures of the following budgeting characteristics: (1) the number of
iterations to finish the budget; (2) whether or not the unit uses a rolling budget; (3) the extent to which the
budget interfaces with the units strategy; (4) the extent to which unit managers are involved in, and have
influence over, the setting of performance targets in the budget for their unit (Brownell, 1982); and (5)
budget target difficulty (Dunk, 1993; Hirst and Lowy, 1990; Kenis, 1979). Finally, we use a multi-item
measure to capture the extent to which unit managers are evaluated primarily on whether or not they
achieve the budget (Van der Stede, 2000, 2001).
3.2.4. Outcome measures

We measure two types of outcomes: overall budget satisfaction and organizational unit performance.
Panel D shows the exact wording of the associated questions.
3.2.4.1. Overall budget satisfaction. In developing our overall budgeting satisfaction measure, we modi-
fied an instrument in Swenson (1995) that measured satisfaction with activity-based costing. We use three
questions to measure overall budget satisfaction: the satisfaction with the budget as an aid to manage the
business; as an aid to make short-term, operational decisions; and as an aid to make long-term, strategic
decisions. These three questions are highly correlated and capture satisfaction with the budget as a tool
to manage the unit and support decision-making.
3.2.4.2. Organizational unit performance. The respondents self-rated the global performance of their
organizational unit. The rating has three components. First, we ask which of the following terms best
describe the units performance in the past budget period: less, equal, or more profitable than direct
competitors (Van der Stede, 2000). Second, we ask the respondents to consider ideal overall perfor-
mance of their unit as 100%, and then to rate their units actual performance over the budget pe-
riod relative to ideal performance on a scale from 0 to 100%.10 Finally, we ask the respondents to
rate their units performance relative to competitors on two dimensions: market-related performance
(e.g., sales growth, market share) and internal operations-related performance (e.g., cost-effectiveness,
quality).
Our survey contains a mix of (adaptations of) existing measures and new measures.11 Regardless of
their source, however, our measures are proxies for inherently complex phenomena only and should be
interpreted with this caveat in mind.
3.3. Sample statistics
Table 2 provides descriptive statistics for our sample. It shows that the 57 respondents are well seasoned:
they have been at their organizations for about 10 years and have been responsible for preparing their unit
10
We obtained this measure directly from the survey developed for the Merchant (1985a, 1990) studies. This measure was not
reported in the published articles.
11
Our survey contains a mix of factual measures and perceptual measures expressing respondents beliefs, many of which are
based on prior work, but some are new or adapted. Of the seven variables in Table 1, Panel B, three are factual (organization
structure, production/task type, and number of employees). Of the other four perceptual variables, one was basically developed
from scratch (resource traceability). Of the six variables listed in Panel C, two are factual (number of budget iterations and use
of rolling budgets). The other four perceptual variables are derived from prior work. (The measure pertaining to the interface of
the budget with the strategy is based on similar measures developed in other contexts (e.g., Shields, 1995), such as regarding the
ABC/strategy-, ABC/JIT-, and ABC/compensation-interfaces.) The two outcome measures (overall budgeting satisfaction and
organizational unit performance) in Panel D are also derived from prior work. In sum, of the eight perceptual variables in Panels
B-D of Table 1, one was developed from scratch (12%) and seven have been used in prior work (88%).
budgets for an average of 5 years. The plurality of our sample organizations is publicly traded (47%),
but there is also a substantial representation from private organizations (39%), and a smaller government
group (14%). About two-thirds of our sample is in manufacturing (65%), while one-third is in service
(35%). Average employment (sales) in our sample organizations is about 4045 people (1 billion dollars).
Table 2 also provides descriptive statistics on the respondents budgets and budgeting processes. The
average unit budget in our sample is 665 million dollars. Contrary to some of the criticisms in the popular
press, most of our respondents (79%) completed their budget on time, and those that did not finished the
budget fairly quickly, within an average of 3.5 weeks overdue.
4. Results
4.1. Analysis of the reasons-to-budget
Our study examines four reasons-to-budget and the first step in our analysis is to determine the com-
monality among them or, conversely, each reasons uniqueness for our research objectives. Table 3, Panel
A, shows that all four reasons-to-budget are significantly correlated (all p < 0.10), except operational plan-
ning and communication of goals, suggesting that the four reasons-to-budget are not entirely independent
or mutually exclusive, as expected.
Table 3, Panel B, shows that the data represent one principal component, suggesting a one-component
factor structure. But, although the four reasons-to-budget load on one factor, the factor statistics also
Table 3
Analysis of the reasons-to-budget
Panel A: Pearson correlations among the importance of the multiple reasons-to-budgeta
1 2 3 4
1. Operational planning 1.00
2. Performance evaluation 0.23 (0.09) 1.00
3. Communication of goals 0.12 (0.37) 0.50 (0.01) 1.00
4. Strategy formation 0.31 (0.02) 0.39 (0.01) 0.31 (0.02) 1.00
Panel B: Factor analysis of the importance of the four reasons-to-budget
Eigenvalue Variance (%) Cumulative (%)
(1) Principal components:
1 1.95 48.73 48.73
2 0.94 23.33 72.06
3 0.63 15.74 87.80
4 0.49 12.20 100.00
(2) One-factor structure for the four reasons-to-budget
Reason-to-budget Factor loading Uniqueness
1. Operational planning 0.52 0.73
2. Performance evaluation 0.80 0.36
3. Communication of goals 0.72 0.48
4. Strategy formation 0.73 0.47
a
N = 57. Two-tailed p-values in parentheses.
suggest that each reason-to-budget has a relatively large uniqueness or variance unexplained by the
common factor. In other words, the factor analysis does not suggest that the four reasons-to-budget are
identical; instead, it suggests merely that they are closely associated.
To exploit the uniqueness of each reason-to-budget, we perform the subsequent analysis on the residuals
obtained from regressing each reason-to-budget on the other three. We now turn to this analysis.
4.2. Analysis of reason-to-budget importance and reason-to-budget performance
We analyze the relationships between the antecedents, the budgeting characteristics, and the importance
and performance of each reason-to-budget with a two-stage least squares (2SLS) model that fits the
following two recursive equations:
IMPORTANCE = 0 + 1 ORG STRUCTURE + 2 DF STRAT + 3 PT TYPE
+ 4 PT INTDPENT + 5 RS TRACE + 6 COMPETITION
+7 LOG(SIZE) + (1)
PERFORMANCE = 0 + 1 BU ITERATION + 2 BU ROLLING + 3 BU STRATLINK

+4 BU TARGPART + 5 BU TARGDIFF + 6 BU EMPHASIS
+7 IMPORTANCE + (2)
The model assumes that the performance of each reason-to-budget is a function of its importance, and
thus, that and are correlated. If and were independent, then Eqs. (1) and (2) could be estimated
separately with ordinary least squares (OLS). Hausman tests, however, indicate that 2SLS-estimation is
generally more appropriate than OLS in every model (p < 0.10). Thus, our previous theoretical argument
that the two equations are related is borne out by the data. Fig. 1 depicts our conceptual approach
underlying the subsequent analyses in Table 4.12
The dependent variables in our analysis are the residuals for the importance and performance of each
reason-to-budget obtained from regressing the importance and performance of each reason-to-budget on
the importance and performance, respectively, of the other three reasons-to-budget, thus running eight
regressions in total to obtain the eight dependent variables (four regressions for obtaining the reason-
to-budget importance residuals and four regressions for obtaining the reason-to-budget performance
residuals). In line with the objectives of our study, we use the residuals to extract the uniqueness of
each reason-to-budget, as our analysis in Section 4.1 (Table 3) indicated that the four reasons-to-budget
exhibit overlap.
Table 4 present the regression results of the antecedents and the control variable (size) on the reason-
to-budget importance (Panel A), and of the budgeting characteristics on reason-to-budget performance
(Panel B) for each of the four reasons-to-budget. All models in Table 4 indicate good fit, as shown by the
2 (all p < 0.10) and acceptable R2 statistics.
12
We also ran several additional specification tests. First, because small sample size is a potential concern, we re-analyzed the
Table 4 results with a statistical adjustment for small samples (Greene, 2003). The results were unaffected by this procedure.
Second, none of the correlations among the independent variables in Table 4 exceed 0.35 (the two largest correlations are 0.31
and 0.34, with the rest being smaller than 0.30), so multicollinearity is not a threat to our results.
430
Table 4
Predictors of budgeting use and performance
Independent variables [1] Operational planning [2] Performance evaluation [3] Communication [4] Strategy formation
S.E. p S.E. p S.E. p S.E. p
Panel A: D.V. = importance of the reasons-to-budget
S.C. Hansen, W.A.Van der Stede / Management Accounting Research 15 (2004) 415439
Constant 1.17 1.34 0.38 1.45 1.50 0.33 2.30 1.23 0.06 3.05 1.34 0.02
ORG STRUCTURE 0.05 0.08 0.50 0.07 0.09 0.41 0.08 0.07 0.26 0.18 0.08 0.02
DF STRAT 0.21 0.22 0.34 0.25 0.25 0.31 0.03 0.20 0.88 0.74 0.22 0.01
PT TYPE 0.34 0.11 0.01 0.07 0.13 0.59 0.22 0.10 0.03 0.42 0.11 0.01
PT INTDPNT 0.19 0.14 0.17 0.19 0.15 0.21 0.23 0.13 0.07 0.02 0.14 0.90
RS TRACE 0.14 0.21 0.51 0.50 0.23 0.03 0.17 0.19 0.39 0.28 0.25 0.26
COMPETITION 0.12 0.25 0.66 0.56 0.28 0.05 0.51 0.23 0.03 0.43 0.21 0.04
LOG(SIZE) 0.08 0.07 0.24 0.11 0.08 0.17 0.09 0.06 0.16 0.04 0.07 0.53
X2 p R2 X2 p R2 X2 p R2 X2 p R2
15.09 0.09 0.24 18.54 0.04 0.22 21.32 0.01 0.34 27.14 0.01 0.41
Panel B: D.V. = performance of the reasons-to-budget

Constant 1.11 1.75 0.53 2.78 1.26 0.03 1.33 1.12 0.24 0.88 1.19 0.46
BU ITERATION 0.10 0.03 0.01 0.12 0.04 0.01 0.15 0.17 0.37 0.01 0.05 0.93
BU ROLLING 0.69 0.33 0.04 0.50 0.31 0.10 0.18 0.26 0.50 0.15 0.24 0.53
BU STRATLINK 0.09 0.18 0.63 0.04 0.16 0.80 0.27 0.15 0.06 0.88 0.30 0.01
BU TARGPART 0.13 0.17 0.44 0.29 0.15 0.05 0.15 0.14 0.26 0.19 0.13 0.15
BU TARGDIFF 0.33 0.27 0.23 0.14 0.18 0.45 0.32 0.20 0.10 0.39 0.18 0.03
BU EMPHASIS 0.08 0.20 0.70 0.47 0.22 0.03 0.05 0.03 0.09 0.32 0.15 0.03
IMPORTANCE 0.77 0.37 0.04 0.79 0.21 0.01 0.51 0.22 0.02 0.46 0.18 0.01
X2 p R2 X2 p R2 X2 p R2 X2 p R2
15.30 0.05 0.15 25.03 0.01 0.39 27.74 0.01 0.40 44.07 0.01 0.56
Overall N = 57. Significant variables at two-tailed p < 0.10 underlined. The dependent variables are the residuals for the importance and performance of each reason-to-budget
obtained from regressing the importance and performance of each reason-to-budget on the importance and performance, respectively, of the other reasons-to-budget, thus running
eight regressions in total to obtain the eight dependent variables (four regressions for obtaining the importance residuals and four regressions for obtaining the performance
residuals). Variable definitions, measures, and descriptive statistics are in Table 1, Panels B and C, for the independent variables. Use of rolling budgets (BU ROLLING) was
reverse coded such that higher scores correspond with higher use of rolling budgets.
This table reports two-stage least squares regressions (2SLS) specified as follows: IMPORTANCE = 0 + 1 ORG STRUCTURE + 2 DF STRAT + 3 PT TYPE +
4 PT INTDPENT + 5 RS TRACE + 6 COMPETITION + 7 LOG(SIZE) + , and PERFORMANCE = 0 + 1 BU ITERATION + 2 BU ROLLING + 3 BU STRAT
LINK + 4 BU TARGPART + 5 BU TARGDIFF + 6 BU EMPHASIS + 7 IMPORTANCE + . In this structural model, performance and importanceof the respective reason-
to-budget are the dependent variables. Because the performance of each reason-to-budget is assumed to depend on its importance, and should not be assumed independent. If
they were, however, ordinary least squares (OLS) regressions could consistently estimate either of the equations separately. We test for this possibility by means of the Hausman
test. The two-tailed significance levels of the Hausman 2 -tests for each of the regressions are 0.09, 0.05, 0.01, and 0.06, respectively, indicating that 2SLS-estimation is more
adequate than standard OLS-estimation.
Fig. 1. Framework.
Looking across the four reason-to-budget performance regressions in Panel A shows that, as expected,
all the antecedents are significant (p < 0.10), except our control variable for size, in at least one reason-
to-budget importance regression. Similarly, all budgeting characteristics are significant in at least one
reason-to-budget performance regression in Panel B. In both panels, however, none of the explanatory
variables are significant in more than three regressions. This is consistent with the notion that the distinct
reasons-to-budget (as operationalized by examining the residuals) are associated with different underlying
drivers. We now turn to discussing the individual regression results in each panel of Table 4.
4.2.1. Analysis of the antecedents of the reasons-to-budget

4.2.1.1. Operational planning. The only result in the first regression in Table 4, Panel A, is that the use of
budgets for operational planning is particularly salient in job shop type operating environments, reflecting
the prominence of operational planning and scheduling in a job shop environment (Silver et al., 1998,
Chapter 17).
4.2.1.2. Performance evaluation. The results indicate that organizations with more easily traceable re-
sources use the budget for performance evaluation (Macintosh and Daft, 1987). Competition, however,
appears to decrease the importance of budgets for performance evaluation, which is consistent with prior
studies to the extent that competition is one possible indicator of greater environmental uncertainty and
uncontrollable risk (Govindarajan, 1984; Merchant, 1990; Raith, 2003).
4.2.1.3. Communication of goals. There are three significant variables when the budget is used for com-
munication: job shop production/task structure, production/task interdependence, and competition. The
first two results suggest that job-shop organizations and/or organizations with highly internally interde-
pendent operating environments, which require the coordination of many distinct inputs and outputs, have
a greater need for communication, and can, and do, use the budget for doing so. In more competitive envi-
ronments, the use of budgets for communication appears to be more important as well (Simons, 1987b).
4.2.1.4. Strategy formation. The fourth regression shows that organizations use the budget for strategy
formation when they are divisionalized, pursue a differentiation strategy, and operate in job-shop type
and competitive environments.
While the literature has not yet produced conclusive evidence on the relationship between budgetary
controls and competitive strategy (Langfield-Smith, 1997), the positive relationship with differentiation
strategy is most consistent with Simons (1987a, 1987b, 1990, 1995). Simons found that firms that pursue
a prospector strategy (which is akin to a differentiation strategy) use budgetary controls to a greater extent
than defenders (which is akin to a strategy of cost leadership). Although Simons finding goes against
the widely-held view that differentiation is best achieved in organizations that minimize formal controls,
it is consistent with our finding here.
The finding that divisionalized firms tend to use budgets for strategy formation is consistent with the
literatures discussion of the budget as an important organizational mechanisms to translate strategy into
action, to monitor the (financial) impacts of such actions in line with strategy, and reciprocally, to adjust
and inform strategy based on the (financial) results vis-`a-vis the plan in decentralized firms (Merchant,
1981; Gul and Chia, 1994; Simons, 1995).
The interpretation of the positive relationship between production type (job shops) and the use of
budgets for strategy formation does not have a strong precursor in the literature. Hitt et al. (1982) find
no significant association between an organizations strategy and production technology. In our data,
production type and organizational strategy are also by themselves insignificantly correlated (r = 0.12,
p = 0.34). However, Hitt et al. (1982) focus exclusively on the strategy per se, and do not address how
the organization collects information to support its strategy. Our result suggests that job shop environ-
ments, which require more information to operate and coordinate, also tend to be associated with use of
that information in the budgeting cycle to (in)form strategy. A similar argument based on the need for
more intensive information processing in competitive environments may explain the positive relationship
between use of budgets for strategy formation and competition (Khandwalla, 1972; Galbraith, 1973).
Finally, although marginally insignificant (0.10 < p < 0.20), the findings also suggest that organizational
size drives the use of budgets for performance evaluation and communication of goals. The finding that
larger organizations tend to rely on budgets for performance evaluation is a well-established result in the
literature (e.g., Merchant, 1981). The idea that large organizations have different communication patterns
than small ones also has been documented in the organizational literature (Mintzberg, 1979).
In sum, our analysis of the antecedents of the reasons-to-budget suggests that the reasons-to-budget
arise not only in different, but also sometimes polar circumstances. In particular, the circumstances
that appear to drive the use of budgets for communication of goals and strategy formation (competitive
environments, in particular) appear to inhibit the use of budgets for performance evaluation. More research
is needed to understand how organizations choose their portfolio of reasons-to-budget in such apparently
incompatible circumstances.
4.2.2. Analysis of reason-to-budget performance

The importance of each reason-to-budget is a significant explanatory variable in all four reason-to-
budget performance regressions in Table 4, Panel B. This dependence lends support for our 2SLS-approach
and suggests that managers pay more attention and devote more effort to reasons-to-budget that are
perceived to be important.
There is some overlap in the significant variables in the reason-to-budget performance regressions,
particularly for budget emphasis, which is significant in three regressions. All other variables are signif-
icant in two regressions, except budget participation, which is significant in the performance evaluation
regression only. Rather than repeat a similar explanation several times, we discuss the common findings
across the multiple reasons-to-budget in the last regression the result appears.
4.2.2.1. Operational planning. In the first regression, we find that performance for operational planning
increases with the use of rolling budgets. This is consistent with Ekholm and Wallin (2000) who find that
firms are replacing their traditional budgets with rolling budgets to improve operational planning and bud-
geting performance. Budgeting performance for operational planning, however, decreases with more nu-
merous budget iterations. Prior work has not addressed the effect of the number of budget iterations on bud-
get performance, but we conjecture that a large number of budget iterations indicate either a large amount
of uncertainty or a lack of agreement about the organizations goals (or their translation into financial
numbers in the budget). Either or all of these factors may (be perceived) to reduce budgeting performance.
4.2.2.2. Performance evaluation. In the second regression, we replicate the well-established result that
budget performance for performance evaluation increases when budgets involve participative target set-
ting (Brownell, 1982; Shields and Shields, 1998). Budget performance for performance evaluation also
increases when emphasis on meeting budgets is stronger. This association is consistent with basic incen-
tives theory; that is, an organization will place more emphasis on budgeting performance (for performance
evaluation generally, or for awarding incentives particularly), when budgets perform well in the sense
of not putting undue risk on the manager in the performance evaluation process (Holmstrom, 1979;
Holmstrom and Milgrom, 1991). The results also show that more numerous budget iterations and use
of rolling budgets decrease budget performance for performance evaluation. The second effect may be
due to the observation that rolling budgets introduce a sense of uncertainty among managers and make it
difficult to design a performance evaluation system (Gurton, 1999).
4.2.2.3. Communication of goals. Budget performance for communication increases when budgets are
more tightly linked with strategy and when emphasis on meeting budgets is stronger. However, budgeting
performance for communication decreases with budget target difficulty.
4.2.2.4. Strategy formation. The results for budget performance related to strategy formation are identical
to those for communication of goals.
The results for the variables that are significant in multiple regressions are presented next.
First, our results indicate that increasing budget emphasis increases budget performance for the reasons
of performance evaluation, communication of goals, and strategy formation. These effects are consistent
with Merchant (1985b), who argues that placing more emphasis on budgets contributes to communicating
more effectively, timely, frequently, and convincingly. Budget emphasis also helps employees better
understand and accept organizational goals, and it improves performance evaluations because it involves
more frequent, more detailed, and timelier monitoring of results.
Second, increasing budget target difficulty decreases budgeting performance in communication and
strategy formation. This supports the argument that the use of budgets for strategy formation is to foster
learning, rather than to set difficult targets to hold employees accountable against (Goold, 1991; Simons,
1990, 1995). Our results indicate that this argument extends to the related use of budgets for commu-
nication of goals. Moreover, increasing target difficulty may encourage managers to misreport and/or
engage in myopic decision-making that, in turn, may inhibit learning, curtail candid communication of
both successes and failures, obstruct strategic adaptability, and weaken competitive strength (Laverty,
1996; Merchant, 1990).
Finally, the finding that budgeting performance for both strategy formation and communication of
goals increases when budgets are more tightly linked with strategy is consistent with the prior literature
on budgeting-strategy alignment (see Langfield-Smith (1997) for a review).
Overall, our analysis of the performance of the reasons-to-budget generates a similar finding as the
antecedent analysis: an organizations reason-to-budget performance is associated with relatively differ-
ent budgeting characteristics for each budget reason (i.e., different variables are significant in different
regressions, and no variable is significant in more than three). And there is again one instance where
the sign of a predictor of budgeting performance reverses across two different reasons-to-budget; that
is, although the use of rolling budgets appears to enhance the performance of budgets for operational
planning, it also appears to inhibit the performance of budgets for performance evaluation. This result is
consistent with the practitioners argument that rolling budgets improve the accuracy of operational fore-
casts and aid operations, but rolling budgets will also change the managers performance targets making
it potentially more difficult to evaluate (and motivate) the managers (Gurton, 1999).
4.3. Analysis of organizational outcomes
Our final analysis examines whether the reasons-to-budget are important in explaining organizational
outcomes. We use two complementary outcome indicators: overall budget satisfaction and organizational
unit performance. We examine the impact on these two outcomes of both the unweighted (i.e., as measured
in the survey) and importance-weighted performance scores of each reason-to-budget. The rationale for
the importance weighting is that high performance for an unimportant reason might not be as valuable as
high performance for an important reason. However, comparing Panels A and B in Table 5 indicates that
the results are qualitatively similar across both specifications.13
Table 5 shows that overall budget satisfaction is significantly and positively correlated with the budget
performance for operational planning, performance evaluation, communication of goals, and strategy
formation. Thus, improved performance on each of the four reasons-to-budget is associated with greater
satisfaction with the entire budgeting system.
13
We originally attempted to perform a multivariate analysis of the relationship between the individual reason-to-budget
performances and the outcome measures. However, the individual reason-to-budget performances are highly correlated, creat-
ing multicollinearity. Therefore, we present the results of univariate correlations between the two outcome measures and the
performance on each of the individual reasons-to-budget.
Table 5
Pearson correlations among the performance per reason-to-budget and (1) overall budget satisfaction and (2) organizational unit
performance
Overall budget satisfaction [BU SATIS] Organizational unit performance [UNIT PERF]
Panel A: Raw reason-to-budget performance scoresa
1. Operational planning 0.46 (0.01) 0.37 (0.02)
2. Performance evaluation 0.39 (0.01) 0.36 (0.02)
3. Communication of goals 0.41 (0.01) 0.24 (0.13)
4. Strategy formation 0.33 (0.01) 0.27 (0.08)
Panel B: Weighted reason-to-budget performance scores by importanceb
1. Operational planning 0.50 (0.01) 0.25 (0.12)
2. Performance evaluation 0.36 (0.01) 0.34 (0.03)
3. Communication of goals 0.38 (0.01) 0.20 (0.21)
4. Strategy formation 0.42 (0.01) 0.35 (0.03)
Overall N = 57. Refer to Table 1, Panel D, for the definition and measurement of overall budget satisfaction and organizational
unit performance. Two-tailed p-values shown in parentheses.
a
The raw reason-to-budget performance score in Panel A stems directly from the 5-point Likert scale in the survey (see
Table 1, Panel A).
b
The weighted reason-to-budget performance score in Panel B is computed per reason-to-budget as the raw performance
score (from the survey, see Table 1, Panel A) times the raw importance score (also from the survey, see Table 1, Panel A)
multiplied by 0.2 (or 20/100). This procedure essentially reduces the self-reported performance score of each reason-to-budget
by 0.20 for each reported Likert-point reduction in the importance score of the corresponding reason-to-budget.
Table 5 also shows that higher budget performance on the operational planning, performance evaluation
and strategy formation reasons-to-budget is positively associated with organizational unit performance.
Hence, a smaller set of factors explains organizational unit performance than overall budget satisfaction.
This suggests that some, but not all budget uses, particularly communication of goals, affect organizational
unit performance.
5. Discussion, limitations, and conclusions
Our study views organizations as having different potential reasons-to-budget that arise in different
contexts. We focus on understanding the importance and performance of four reasons-to-budget: opera-
tional planning, performance evaluation, communication of goals, and strategy formation.
Our results follow a simple path. We begin by investigating the four reasons-to-budget and show that,
while they are not totally independent, they are sufficiently distinct to warrant analysis by themselves.
Our subsequent regression analysis extracts each reason-to-budgets uniqueness to examine whether
indeed different reasons-to-budget are associated with different underlying drivers.
The second step of our analysis looks at which aspects of organizational settings generate specific
reasons-to-budget. Our analysis identifies a small set of antecedents for each reason. For example, we
find that budgets appear to be used for performance evaluation in large organizations and those with more
clearly delineated, traceable resources. And, although firms that face more competition appear to find the
budget important for communication of goals and strategy formation, the same competitive conditions
appear to negatively affect the importance of budgets for performance evaluation. Overall, we find that the
significant antecedents generally exhibit little overlap across reasons-to-budget, and that some do have
opposite signs for different reasons-to-budget. This suggests that the drivers of the multiple reasons-to-
budget are not always compatible across reasons-to-budget. More research is needed to understand how
organizations handle their portfolio of reasons-to-budget in these sometimes conflicting circumstances.
Once we identify which drivers affect organizations use of budgets for specific reasons, we turn
to understanding how well organizations perform in satisfying these reasons. The heterogeneity in the
reasons-to-budget analysis continues in the reason-to-budget performance analysis. Different sets of bud-
geting characteristics affect the performance of different reasons-to-budget. For instance, use of a rolling
budget improves budgeting performance for operational planning while it decreases budgeting perfor-
mance for performance evaluation. Target difficulty, on the other hand, decreases budgeting performance
for both communication of goals and strategy formation. These findings suggest that there is no single set
of budgeting characteristics that uniformly, and positively, affects each reason-to-budget performance. In
other words, various budget uses require varying degrees of budget participation, budget target difficulty,
and so on, for their use to be effective.
Our final analysis takes the four reasons-to-budget and looks at how their reason-to-budget performance
affects two outcomes. The performance of budgets for operational planning, performance evaluation, com-
munication of goals, and strategy formation are all positively associated with greater overall satisfaction
with the entire budgeting system. However, only performance for three of these reasons-to-budget (oper-
ational planning, performance evaluation, and strategy formation) affect organizational unit performance.
In other words, organizational unit performance has fewer direct relationships with our reasons-to-budget
than overall budgeting satisfaction.
Our findings should be interpreted with the following limitations in mind. Although we have the min-
imum required number of observations per parameter in our models, our sample size is small. While
smaller samples are biased against finding any statistically significant differences, and thus, more likely
to detect larger, substantively significant differences (Sapsford, 1999), they raise an issue of the general-
izability of our results. Moreover, while our respondents are people responsible for preparing the budget
for their organizational unit, and thus appropriate target respondents, they are also associated with the
same organization (CAM-I), which may introduce self-selection bias.
There are also issues with using the survey method to assess the complex organizational circumstances
in which the different budget uses arise. By including four reasons why organizations budget and many
explanatory variables related to their importance and performance, our study is broader than it is deep.
Each budget use could easily be the subject matter of several studies in their own right. Thus, future
research is needed to more deeply understand any or a number of these reasons and their contextual
settings and effectiveness.
Our tests of the impacts of budgeting on organizational performance (outcomes) also call for several
cautionary notes. First, our performance tests are univariate (see footnote 13). Second, the effects of
budgeting on organizational performance may not be linear. Third, the effect of any one organizational
practice (budgeting in this case) on organizational performance is likely to be small by itself. Fourth,
cause-and-effect is difficult to disentangle in a cross-sectional setting like ours. For these reasons, many
studies, particularly those rooted in the economics paradigm, refrain from testing such performance ef-
fects and simply assume optimality-of-sorts; i.e., they assume that managers would not intentionally take
decisions (e.g., about their use of budgets) that reduce performance, thus rendering an explicit perfor-
mance test obsolete. With these cautionary notes in place, however, we do believe that our performance
results are both informative and supportive of the general expectation that well-chosen budgeting prac-
tices should have positive (contemporaneously or delayed, linear or non-linear) effects on organizational
performance.
Although the idea of multiple uses of budgets in organizations is not new, the prior literature has not
focused on many of the reasons-to-budget (as extensively as on the performance evaluation reason) that
the practitioners involved in our study suggested including. Our choice of reasons-to-budget was largely
driven by our sponsors focus on the people responsible for preparing the budget for their organizational
unit, not people who merely consolidate the budget in the corporate control or finance office. However,
at higher levels of the organization there are additional potential reasons-to-budget, such as allocating
resources and authorizing spending. Future research could augment our list with additional reasons and
include other organizational levels (e.g., corporate managers and controllers).
Finally, our list of antecedents is also limited (both in terms of the variables included and the scope of
their measurement in the survey), and could be usefully expanded to include, for example, industry and or-
ganization life cycle characteristics. An organizations reasons-to-budget may evolve as it moves from in-
fancy (entrepreneurial, organic) to maturity (bureaucratic, formalized) (Davila, 2002); and strategy forma-
tion (operational planning) may be more (less) important in startups than in mature industries. Further work
along these lines would deepen our understanding of the context and roles of budgeting in organizations.
Acknowledgments
This research could not have been conducted without the unfailing support of the CAM-I Activity-
Based Planning and Budgeting Group, Ron Bleeker (the CAM-I Cost Management Section Director), and
the financial assistance of Bruce Miller. We thank the editor (Bob Scapens), two reviewers, Paul Dierks,
and Mahendra Gupta for their comments and insights, as well as workshop participants at the CAM-I 2002
First Quarter Meeting, California State University at Fullerton, George Washington University, Indiana
UniversityPurdue University at Indianapolis, Kansas State University, and the University of Toronto.
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Hansen, Van Der Stede - 2004 - Multiple Facets of Budgeting An Exploratory Analysis

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Management Accounting Research 15 (2004) 415439

Multiple facets of budgeting: an exploratory analysis

Received 8 September 2003; accepted 16 August 2004

Keywords: Budgeting; Planning; Management control; Performance evaluation

1. Introduction and overview

2. The basic framework

2.1. The reasons-to-budget

2.2. Antecedents of the reasons-to-budget

2.3. Reason-to-budget performance

3. Survey, data, and measures

3.1. Data collection

3.2.1. Reason-to-budget importance and reason-to-budget performance

3.2.2. The antecedents of the reasons-to-budget

3.2.3. Budgeting characteristics

3.2.4. Outcome measures

3.3. Sample statistics

4.1. Analysis of the reasons-to-budget

4.2. Analysis of reason-to-budget importance and reason-to-budget performance

PERFORMANCE = 0 + 1 BU ITERATION + 2 BU ROLLING + 3 BU STRATLINK

Panel B: D.V. = performance of the reasons-to-budget

4.2.1. Analysis of the antecedents of the reasons-to-budget

4.2.2. Analysis of reason-to-budget performance

4.3. Analysis of organizational outcomes

5. Discussion, limitations, and conclusions

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