Michika Stephanie (A 311 08 325)

Donna Adelina Gultom (A 311 10 256)

Hans Jonni (A 311 10 268)
Sthefanie C. Parera (A 311 10 272)

Introduction
Budget making is a technical task. The
behavioral aspects of budgeting refer to the
human behavior that is brought out in the
process of preparing the budget and the
human behavior that is induced when people
try to live with the budget. Budgets have a
direct impact to human behavior. Budgets tell
people what is expected of them and when it
is due.
Budgets are managerial plans for
expressed in financial terms. They are
short-term comprehensive profit plans
that put managements objectives and
goals into operation. They are
managerial tools that insure the
attainment of organizational goal and
provide the dollar-and-cent guidelines
for day-to-day operations.
1. They are the final result of a firms planning process.
2. They are the firms blueprint for action, reflecting
managements priorities in the allocation of organizational
resources.
3. They act as an internal communication device that links the
various organizational departments or divisions with each
other and with top management.
4. By stating goals in terms of measurable performance criteria,
budgets serve as standards against which actual operating
results may be compared.
5. They serve as control devices that allow management to
pinpoint the areas of the company that are strong or weak.
6. They attempt to influence and motivate managers and
employees to continue to act in ways that are consistent with
effective and efficient operations and in congruence with
organizational goals.
There are three major stages in the
budget-making process:

1. Goal setting,
2. Implementation,
3. Control and performance evaluation.
1. Top management has to decide what the firms short
range objectives are and what strategies will be used
to attain them.
2. Goals have to be set and resources allocated. Goals
are the short-range quantification of the objectives.
3. A comprehensive budget or profit plan has to be
prepared then approved by top management.
4. Finally, it is used to control cost and to pinpoint
problem areas in the organization by periodically
comparing actual performance results to the budgets
goals.
The planning activity begins with the
translation of board organizational
objectivities into specific activity goals. To
develop realistic plans and create a work-
able budget, extensive interaction is require
between the organizations line and staff
managers. The controller and director
planning play key roles in this human
process of budget making.
In the implementation stage, the formal
plan is used to communicate organizational
objectives and strategies and to positively
motivate people in the organization. This is
achieved by providing detailed performance
goals to those responsible for action. The
major behavioral concepts that impact the
implementation phase are communication,
cooperation, and coordination.
After the budget has been implemented, it functions
as a key element in the control system. It becomes a
yardstick against which actual performance is
compared and it serves as the basis for management by
exception. It should be pointed out the management
by exception does not hold that only unfavorable
variances need to be investigated. Rather, managers
should concern them self first with the unfavorable
variances. Indeed, to maintain efficiency in operations,
both above- standard and substandard performances
are to be recognized and investigated.
The multiple function of the budget as a
goal setting, control, and performance
evaluation mechanism may trigger
numerous dysfunctional consequences such
as distrust, resistance, internal conflict, and
other unwanted side effects.
A budget consists of a set of specific goals. It is a source of
pressure that can create mistrust, hostility, and lead to
declining performance. The reasons for distrust are based
on supervisor beliefs that:
Budgets tend to oversimplify or distort the real situation
and fail to allow for variation in external factors.
Budgets do not adequately reflect qualitative variables such
as know how the labor force, quality of materials, and
efficiency of machinery.
Budgets simply confirm what supervisors already know.
Budgets are frequently used to manipulate supervisors so
the indicated performance measures are suspect.
Budget reports emphasize result, not reasons.
Budgets interfere with supervisors leadership styles.
Budgets tend to emphasize failure.
Although budgets are widely used and their benefits
strongly supported, they are still resisted by many
organizational participants. One major reason for this
is that budgets foreshadow and bring about change,
thereby threatening the status quo.
Another reason for budget resistance is that the
budget process requires a great deal of time and
attention. Manager or supervisors might feel overly
burdened with extensive demands on their time and
with other day-to-day responsibilities. Finally, many
managers and supervisors simply do not understand
the intricacies of budgeting making.
Budgets require interaction between people at
different organizational levels. Internal conflict
may develop as a result of these interactions, or as
result of performance reports that compare one
department to another.
Internal conflict creates a competitive and hostile
work environment. Conflict may cause people to
focus exclusively on their own departments needs
rather than the needs of the total organization.
This situation renders goal congruence more
difficult, it is not impossible, to achieve.
Budgets may produce other undesirable side
effects. Budgets are frequently perceived as
managerial pressure devices. People feel pressure
when top management attempts to improve
efficiency by obtaining more output from given (or
lower) levels of input. Budget pressure is most
acute for supervisors who are responsible for
meeting particular goals. Because supervisors are
often unable to pass this responsibility to
subordinates, they resort to various dysfunctional
actions, one of which is distorting the
measurement process.
The Impact of the planning environment
Before we can meaningfully discuss the behavioral
science concepts that the impact the planning or
budget-making process, it is necessary to introduce
the factors that cause variation in the planning
environment. The planning environment refers to the
structure, process, and interaction patterns in the
work setting. In one environment, a specific action by
top management may induce favorable behavior and
budget results, while the same action in a different
environment may induce undesirable behavior and
dysfunctional budget results.
The size and structure of an organizational
influences human behavior and interaction
patterns in the goal-setting, implementation, and
control and evaluation stages of planning process.
The planning environment is also affected by the
degree of autonomy, or decision-making
prerogative, granted to subunits and/or lower-level
managers. This aspect of organizational structure
is usually expressed in terms of centralization
versus decentralization. Decentralized firms will
require a system that enhances companywide
participation, cooperation, and coordination.
Leadership style also affects an organizations
planning environment. McGregors theory, X
described a tightly controlled, authoritarian
leadership style in which need for efficiency and
control dictates the managerial approach for dealing
with subordinates. In contrast, McGregors theory Y
and Likerts democratic leadership style encourage
employee involvement and participation in goal
setting and decision making. However, research has
revealed that people identify more closely with the
budget and make greater efforts to achieve the stated
goals when they participate in setting those goals.
Another factor affecting the planning environment
is the external environment. This includes the
existing political and economic climate,
availability of supplies, structures of the industries
that service the organization, the nature of
competition, and so on. Frequent goal and/or
strategy adjustment may be necessary. In these
instances, authoritarian leadership styles have
proven more efficient than democratic,
participative styles.
RELEVANT BEHAVIORAL SCIENCE CONCEPTS
IN THE BUDGETING PROCESS
The Goal-Setting Stage
During the goal-setting stage, top
managements broad objectives are translates
into definite and measureable goals for the
organization and for each of the major subunits
(the responsibility centers). It is important to
keep in mind that people in the organization
are responsible for determining objectives and
setting goals.
Goal congruence or compatibility occurs when
individuals perceive that their personal needs
can be best satisfied by achieving the
organizational goals. If organizational goals are
perceived as a means for attaining personal goals
or for satisfying personal needs, it will motivate
employees to complete the desired action.
Congruence between organizational and
personal goals can also be enhanced by
explaining to employees the rationale upon
which the organizational goals are based.
Participation is a process of joint decision-making by
two or more parties in which the decisions have future
effects on those making them. In other words, workers
and lower-level managers have a voice in the
management process. When applied to planning,
participation refers to the involvement of middle and
lower level managers in the decisions leading to the
determination of operational objectives and the
setting of performance goals. Participation has been
shown to positively affect employee attitudes, increase
the quantity and quality of production, and enhance
cooperation among managers.
One benefit of successful participation is that
participants become ego-involved and not just
task-involved in their work. It enhances morale
and induces greater initiative at all management
levels. Meaningful participation also increases
the sense of group cohesiveness, which in turn
tends to increase cooperation among group
members in goal setting. The organizational
goals that people help establish will then be
perceived as being in congruence with their own
personal goals. This process is called goal
internalization.
Even under the most ideal conditions, participation in
goal setting has its limitations. The process of
participation gives managers power to establish the
content of their budget. This power may be used in a
manner that has dysfunctional consequences for the
organization. If a firm is unable to effectively use true
participation, it may be wiser to follow authoritarian
budget practiceand honestly admit it. Status and
influence in an organizational may also put a dumper
on effective participation. People who occupy higher
organizational position, have more dominant
personalities, or have greater social status may have
excessive influence on policy determination and the
goal-setting process.
After the organizational goals have been set, the
planning director consolidates them into the
comprehensive formal budget. This companywide
blueprint for action is then approved by the
president or the board of directors. The budget is
implemented through communication to key
organizational personnel. This informs them of
management expectations, resource allocations,
production quotas, and time limits.
The controller or director of planning is
responsible for implementing the budget. This is
accomplished by communicating the approved
operational goals to people at lower organizational
levels. Many complex communication problems
may develop in this selling task because the
message must be understood by people who have
diverse backgrounds and training and who work at
different organizational levels. The sub-goals can
be communicated most effectively if they are
personally explained and supplemented with
written guidelines or informal follow-up
discussions with subunit leaders.
Successful budget implementation requires the
cooperation of people with widely diverse skills
and talents. Each dimension of the plan should be
carefully explained to those responsible for action
to develop in them a sense of their own
involvement and importance in the overall budget
context. The planning director should be mindful
that possible intra-group conflicts may impair
cooperation among subunits. This problem should
be deal with as soon as detected to avoid more
seriously organizational consequences.
Budgeted goals are rarely attain without
continuously monitoring employee progress
toward achieving their goals. In the control
and performance evaluation stage, actual
performance was compared to the budgeted
standards in order to pinpoint problem
areas in the organization and to suggest
appropriate actions to correct substandard
performance.
To maintain control over costs and to keep employees
motivated toward goal achievement, performance
reports should be prepared and distributed at least
monthly. The importance of frequent communication
of performance results have been repeatedly
demonstrated in empirical studies. The timely
issuance of performance reports has a reinforcing
effect on employee morale. The lack of performance
feedback, delays in feedback, and infrequent or
sporadic feedback have an extinguishing effect on
morale and performance. Lack of feedback was
accompanied by low confidence and hostility.