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)

Accounting Behavioral

Group 3:

IntroductionBudget 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.

Behavioral Aspects of Profit Planning and Budgeting—I

Budgets are managerial plans for expressed in financial terms. They are short-term comprehensive profit plans that put management’s 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.

The Multiple Functions of Profit Planning and Budgeting.

1. They are the final result of a firm’s planning process.2. They are the firm’s blueprint for action, reflecting

management’s 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.

Budgets have several functions:

There are three major stages in the budget-making process:

1. Goal setting,2. Implementation,3. Control and performance

evaluation.

A Behavioral Overview of the Budget-Making Process

1. Top management has to decide what the firm’s 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.

To develop a budget or profit plan, certain sequential steps have to be

taken:

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 organization’s line and staff managers. The controller and director planning play key roles in this human process of budget making.

Goal-Setting Stage

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.

Implementation Stage

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.

Control and performance evaluation stage

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.

Dysfunctional Consequences of the Budget-Making Process

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.

Distrust

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.

Resistance

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 department’s needs rather than the needs of the total organization. This situation renders goal congruence more difficult, it is not impossible, to achieve.

Internal conflict

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.

Other unwanted side effects

The Impact of the planning environmentBefore 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.

Relevant Behavioral Science Concepts in the Planning Environment.

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.

Organizational size and structure

Leadership style also affects an organization’s planning environment. McGregor’s 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, McGregor’s theory Y and Likert’s 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.

Leadership style

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.

Stability of organizational environments

RELEVANT BEHAVIORAL SCIENCE CONCEPTS IN THE BUDGETING PROCESSThe Goal-Setting StageDuring the goal-setting stage, top management’s 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.

Behavioral Aspects of Profit Planning and Budgeting-II

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.

Goal Congruence

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.

Participation

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.

Benefits From Participation

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 practice—and 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.

Limitations and Problems of Participation

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 Implementation Stage

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.

Communicating the Budget

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.

Cooperation and Coordination

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.

The Control and Performance Evaluation Stage

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.

Performance Reports