Budgetary Process and Behavioral Aspects in Finance

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Introduction to Management Accounting
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Table of Contents
1. Introduction..................................................................................................................................3
2. Investigation of the sequence of budgetary process....................................................................3
3. Critical examination of the issues of relevance in behavioural aspects of budgeting process....6
4. Conclusion...................................................................................................................................7
Reference list...................................................................................................................................8
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1. Introduction
For all enterprises throughout the world, there is an imperative function that managerial
accounting has to play. This is because there are diverse sorts of techniques as well as tools and
systems by the application of which enterprises are benefitted and are able to improve their
efficacy in diverse manner. Among these tools, budgets are one that helps enterprises in serving
the requirement of the management for making its decisions and judgments along with
controlling and planning its performance (To et al., 2016). However, for ensuring that budgets
are effectual by nature and assists in enhancing organisational performance, enterprises are to
ensure that the process of budget preparation is efficient by nature. At the same time, enterprises
must also keep in mind that there are certain problems regarding the behavioural characteristics
that are possessed within the process of budgeting itself. All these factors and aspects related to
budgets are going to be discussed in this report.
2. Investigation of the sequence of budgetary process
One of the most effectual tools that can be used within an enterprise is the budget. According to
Miller (2018), budgeting is the course of action or the practice, which are prepared and
developed within enterprises for spending the money or the amount of funds held within it. By
creating budgets, enterprises can derive in advance whether it would be having enough money or
not for performing its activities. However, for ensuring effectiveness in the process of budgeting
in an enterprise, there is a definite process, which requires being adopted. In the following
diagram, the sequence or the series of steps that are necessary to be followed for the preparation
of budgets within an enterprise have been mentioned -
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Figure 1: List of the diverse stages or processes by which a budget passes and through
which a budget is prepared within an enterprise
(Source: Created by the learner)
 Setting goals and objectives - In the first place, before figuring out a budget, an
organisation requires setting out the goals and objectives of the budget, which is done
either by the budget committee or by the key decision makers (Melkers, 2015). The
sequence of the budgetary procedure passes through this step at the beginning itself.
 Deriving resource availability - The next stage of the sequence includes an organisation
to analyse the resources possessed in it and whether their availability would be sufficient
for meeting budget goals or not. The common resources that an organisation requires to
keep a check for budget preparation includes the cash in hand, the assets held within it,
its potential loans, outside investments and such other factors.
 Projecting future requirements - Shapiro and Talmon (2017) mentioned that budgets,
by their nature are forward looking and deals with conducting a certain level of
estimation. Due to this, for preparing budgets, it is essential to project the future
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1Settingobjectives2Determiningavailableresources3Projectingfutureneeds4Matchingfutureneedstoavailableresources5Obtainingfinalapproval6Distributingtheapprovedfunds7Monitoringandevaluating

requirements of an organisation in an accurate way. These future needs must be projected
with caution even if they are not entirely accurate by nature.
 Matching future requirements with available resources - For almost every
organisation, resources available are not matched with the future needs that have been
projected. Due to this, negotiations and comprises are needed to be made within the
diverse divisions of the organisation for allocating of resources in the best possible
manner. It also requires keeping in mind the business priorities and the strategic needs
during this stage in the sequence.
 Attaining final approval - After the procedure of budgeting or budget development
expires, organisations require ensuring that a final approval is attained from the
committee responsible for budgeting or any individual or group of individuals who have
the responsibility for making the final approval for the organisation’s budget (Wildavsky,
2017). The concerned authority provides this approval only if it is found out the prepared
budget considers stakeholder interests and their needs can be met by its outcomes.
 Distributing the funds approved - Once an organisation’s budget is finalised as well as
approved, the second last stage in the budgeting sequence includes the distributed of the
funds allocated in the budget for its diverse divisions and segments. This responsibility
usually lies with either the CFO (Chief Financial Officer) of an organisation or the
controller of the organisation.
 Monitoring and evaluating - After the successful execution of all the stages or steps in
the budgeting sequence, the last stage of budget preparation and development is
monitoring and evaluating (Mayne, 2017). This is because once a budget is finalised
while funds are distributed, budgeting sequence does not get over. In this stage, the
managers need keeping an active track of the success of the budgets drafted by the
organisation through constant evaluation, tracking, monitoring and supervision. Thus, the
last stage of the budgeting sequence is concerned with identification of the lack of
adequate resources within an organisation and areas with which wastes do not exist and
various such factors, which need being considered for the budget cycles in the
forthcoming periods.
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3. Critical examination of the issues of relevance in behavioural aspects of budgeting
process
Despite of the fact the budgeting process is of great significance and relevance within
enterprises, it is necessary to keep in mind there are specific problems or issues, which
enterprises might also face whenever the budgeting process is being executed in it (Bogsnes,
2016). In the following point, a detailed evaluation has been made on the behavioural
characteristics that are possessed within the process of budgeting that enterprises must be aware
of -
 The creation of budgetary slack - The creation of budgetary slack is one of the most
common issues arising within organisational contexts because of budgeting. De
Baerdemaeker and Bruggeman (2015) defined budgetary slacks as the discrepancies,
which exist in the allocated resources of an enterprise in the budgets in relation to the
ones needed in reality. During the procedure of budget preparation, the managers of an
enterprise often tend to create of a ‘budgetary slack’, which is also called the padding of
budget. When this slack is formed, managers tend to overestimate organizational costs
while ensuring the underestimation of the revenues it has earned, thereby putting up
requests for allocating higher resources depending over their experiences previously. Due
to this, actual expenses that were allocated to managers are lesser than the request amount
and there lies the tendency of summing a mark-up for what was previously estimated
because of which though there is a decrease in actual expenditure, the amount that was
assigned for managers does not deviate considerably.
In an organisational context, budgetary slacks can also be formed whenever revenues are
underestimated and costs are overestimated, thereby showing that the managers have
performed beyond the performance they were expected to project, creating higher
chances of taking advantages of the budgetary slack (Daumoser et al., 2018). In case if
the budgetary slack do not occur, the actual performance would not have been addressed.
Thus, in such a manner, managers of an organisation possess the tendency of creating
budgetary slacks when the budgeting process is being executed and whenever the actual
performance has a direct relation with rewards or incentives, there is a high possibility
that managers would end up building a budgetary slack for ensuring their own
advantages.
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 The dysfunctional behaviour of budgets - Whenever the budgetary goals of an
organisation are same as its managerial goals when budgeting procedure is executed, the
organisation’s actual performance might be meeting the expected or anticipated
performance level while exceeding the expectations as well. Such an alignment of
budgetary goals with managerial goals is goal congruence and whenever this occurs, it
acts as a motivating factor for managers to accomplish budgeting goals and targets
(Cuguero-Escofet and Rosanas, 2016).
However, when goals are incongruent, managers are automatically de-motivated and tend
to apply only minimum level of efforts, which in certain instances is no effort towards the
attainment of budget goals, thereby influencing organisational performance. In instances
where budgetary targets are unrealistic in nature or are the budget is inappropriately
implemented, workers may end up reacting negatively towards budgets. This might be
having an adverse impact on the real performance of the organisation. Generally, when
such a situation arises, the expected or anticipated performance levels are not met, while
the objectives and goals of the budget remain unattained. These conflicts between
organisational goals with the way in which its managers behave are the ‘dysfunctional
behaviour’ and such behaviour acts as a significant issue regarding a budget’s
behavioural aspect (Johanse and Christoffersen, 2017).
4. Conclusion
Hence, the evaluations and the findings of the report lead to the conclusion that the system of
budgeting not only helps enterprises in serving the requirement of the management for making
its decisions and judgments but also for controlling and planning. It helped in identifying the
diverse steps and stages by which the budgetary process has to pass through followed by
examination of the different forms of issues or problems that enterprises commonly face because
of the behavioural characteristic or aspects that are possessed within the process of budgeting
itself, for example, budgetary slack and the dysfunctional behaviour of budgets.
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Reference list
Bogsnes, B., 2016. Implementing beyond budgeting: Unlocking the performance potential. John
Wiley & Sons.
Cuguero-Escofet, N. and Rosanas, J.M., 2016. Justice: A sufficient condition for goal
congruence in management control systems. European Accounting and Management
Review, 2(1), pp.104-122.
Daumoser, C., Hirsch, B. and Sohn, M., 2018. Honesty in budgeting: a review of morality and
control aspects in the budgetary slack literature. Journal of Management Control, 29(2), pp.115-
159.
Johansen, T.R. and Christoffersen, J., 2017. Performance evaluations in audit firms: Evaluation
foci and dysfunctional behaviour. International Journal of Auditing, 21(1), pp.24-37.
Mayne, J.W., 2017. Monitoring performance in the public sector: Future directions from
international experience. Routledge.
Melkers, J.E., 2015. Budgeting: Implementing Performance-Based Budgets. In Encyclopedia of
Public Administration and Public Policy-5 Volume Set (pp. 1-4). Routledge.
Miller, G., 2018. Performance based budgeting. Routledge.
Shapiro, E. and Talmon, N., 2017. A Democratically-Optimal Budgeting Algorithm. arXiv
preprint arXiv:1709.05839.
To, H., Fan, L., Tran, L. and Shahabi, C., 2016, March. Real-time task assignment in hyperlocal
spatial crowdsourcing under budget constraints. In 2016 IEEE International Conference on
Pervasive Computing and Communications (PerCom) (pp. 1-8). IEEE.
Wildavsky, A., 2017. Budgeting and governing. Routledge.
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