632598256894

udget, we just add more to it next period,” it is likely that the budget control process is not effective.
If, by contrast, employees state, “If we are over our budget by more than 2%, we will be called on the
carpet and forced to explain the problem,” then one knows the control process is having an impact.
Improper Use of Budgets
Sometimes managers use budgets as scapegoats for unpopular decisions. For example, rather than
telling a department head that his or her budget request for three additional employees was not
convincing when compared with all of the other budget requests, the vice president says, “The budget
just would not allow any new employees this year.” In another case, the director of the marketing
department has requested travel funds to send all of his staff to an overseas education program. The
vice president believes the program is a waste of money. Instead of giving the marketing director his
opinion, the vice president says, “We would really like to send your staff to the program, but the
budget is just too tight this year.” The truth in this situation is that the trip is not a good use of business
resources, regardless of the condition of the budget. The marketing director is left with the impression
that the real problem is the state of the budget, when in fact the benefits of his travel proposal did not
outweigh the cost. Management should be careful not to undermine the budgeting process by
assigning adverse characteristics to it.
Behavioral Issues in Budgeting
Many of the internal accounting reports prepared in business are intended to influence managers and
employees to behave in a particular way. For example, many manufacturing cost reports are designed
to make employees aware of costs with the intent of controlling or keeping costs at some desired or
acceptable level. Similarly, reports that compare the performance of one division with the
performance of others are used to evaluate the performance of division managers and encourage better
results for each division.
Budgets and budget performance reports are among the more useful internal accounting reports
used by businesses to influence employee performance in a positive manner. Budget control is based
on the concept that managers are held responsible for activities they manage. Performance reports
reflect the degree of achievement of plans as embodied in the budget. To minimize adverse behavioral
problems, care should be taken to develop and administer budgets appropriately. Budgets should not
be used as a hammer to demand unattainable performance from employees. The best safeguard against
unrealistic budgets is participative budgeting.
Developing a Budget
Budgets are useful, and in most cases they are essential to the success of virtually all organizations,
whether they are for-profit companies or not-for-profit organizations. The larger and more complex
the organization, the more time, energy, and resources must be used in preparing and using the budget.