Accounting: The Language of Business - Vol. 1 (Part 129)

“There is no business like show business. There is also no business like certified public accounting, but that doesn’t rhyme as well.”

—Craig Shaw Gardner, Author, A Changeling Star

Budgeting (Part B)

by

Charles Lamson

Human Behavior and Budgeting

In the budgeting process, business, team, and individual goals are established. Human behavior problems can arise if (1) the budget goal is unachievable (too tight), (2) the budget goal is very easy to achieve (too loose), or (3) the budget goals of the business conflict with the objectives of employees (goal conflict).

Setting Budget Goals Too Tightly

People can become discouraged if performance expectations are set too high. For example, would you be inspired or discouraged by a guitar instructor expecting you to play like Eric Clapton after only a few lessons? You would probably be discouraged. This same kind of problem can occur in businesses if employees view budget goals as unrealistic or unbelievable. In such a case, the budget discourages employees from achieving the goals. On the other hand, aggressive but attainable goals are likely to inspire employees to achieve the goals. Therefore, it is important that employees (managers and non managers) be involved in establishing reasonable budget estimates.

Involving all employees encourages cooperation both within and among departments. It also increases awareness of each department's importance to the overall objectives of the company. Employees view budgeting more positively when they have an opportunity to participate in the budget-setting process. This is because employees with a greater sense of control over the budget process will have a greater commitment to achieving its goals. In such cases, budgets are valuable planning tools that increase the possibility of achieving business goals.

Setting Budget Goals Too Loosely

Although it is desirable to establish attainable goals, it is undesirable to plan lower goals than may be possible. Search budget "padding" is termed budgetary slack. An example of budgetary slack is including spare employees in the plan. Managers may plan slack in the budget in order to provide a "cushion" for unexpected events or improve the appearance of operations. Budgetary slack can be avoided if lower and mid-level managers are required to support their spending requirements with operational plans.

 Slack budgets can cause employees to develop a "spend it or lose it" mentality. This often occurs at the end of the budget. When actual spending is less than the budget, employees may attempt to spend the remaining budget (purchase equipment, hire consultants, purchase supplies) in order to avoid having the budget cut next period.

Setting Conflicting Budget Goals

Goal conflict occurs when individual self-interest differs from business objectives. This can happen when management establishes individual goals that conflict with overall business objectives. Often, such conflicts are subtle. For example, the Sales Department manager may be given a sales goal, while the Manufacturing Department manager may be given a cost reduction goal. It is possible for both goals to conflict. The Sales Department may increase sales by promising customers small product deviations that are difficult and unprofitable to make. This would increase sales at the expense of Manufacturing's expense reduction role and impact the overall profitability objectives of the firm. Likewise, Manufacturing may schedule the plant for maximum manufacturing efficiency with little regard for actual customer product demand. This would reduce manufacturing costs at the expense of the sales goal and reduce the overall profitability of the firm. Goal conflict can be avoided if budget goals are carefully designed for consistency across all areas of the organization. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 873-874*

end