400 Accounting: Business Reporting for Decision Making
The analysis of the variance between actual and budget for Mountain Blue Bikes shows that the
entity’s actual activity did not occur as estimated in the budget. Although the entity was able to reduce
expenditure in the support department costs, this was offset by lower sales and higher cost of sales. In
response to the variances, Anni, the accountant, would need to discuss the budget variances with both
the marketing and production personnel to try to understand the causes of the variances. After meetings
with operational managers, Anni was able to ascertain that negative customer reaction to a price increase
was responsible for the sales shortfall. Also, a long-term supplier had gone into voluntary adminis-
tration and the new supplier was charging more per unit for the raw material components of the bike.
Support department costs were lower because new technology had not been purchased, which reduced
the depreciation charge for the year. Discussions with managers about why the variances have arisen will
enable corrective action to be taken (if necessary) and allow for better planning next year.
9.7 Behavioural aspects of budgeting
LEARNING OBJECTIVE 9.7 Discuss the issues associated with the behavioural aspects of budgeting.
The behavioural aspect of budgeting and planning seeks to explore two key areas. The first relates to the
‘style’ of budgeting process used by the organisation, such as the extent of participation by managers in
the annual budget process. The second relates to the impact of the budget targets and plans on the behav-
iour, motivation and decision making of the manager.
Styles of budgeting
Each organisation will have a particular style which reflects how the budgeting process is executed each
year. Two common contrasting styles are the authoritarian and participative styles of budgeting. In an
authoritarian style of budgeting, senior management simply sets the targets and the budget for unit man-
agers. In this case, the unit managers have little say in the targets that are set and may not have an influence
over the motivation of the manager. Alternatively, in a participative style of budgeting, the targets and
budgets are arrived at by a process of discussion and negotiation between senior management and unit
managers. In this case, the unit managers are seen to have had a say in the setting of targets and the budget
and consequently managers are more likely to adopt ownership of the targets and the budget. On the other
hand participation provides the opportunity for line managers to suggest targets and budgets which con-
tain some ‘room to move’, and result in the creation of budgetary slack. While budgetary slack might be
explained in a number of different ways, it essentially results in targets that might be a little more easily
achievable than otherwise might be the case. If a number of managers engage in this practice, then the ulti-
mate target and budget potentially becomes meaningless.^1 However, it should be noted that managers may
not necessarily intend to deceive, but it may be more a function of human behaviour and nature.
Of course, one of the reasons for the existence of budget slack is that targets are used to evaluate
performance through a control function; that is, when actual performance is compared to the planned
performance or target. Where this performance evaluation is then linked to rewards and bonuses, the
incentive for trying to influence the target setting in the first place is increased.
Finally, an interesting issue arises when we think about the options a senior manager has when the
existence of budget slack is discovered. To what lengths is the manager prepared to go to remove it?
Organisational practices may help contribute to the existence of ‘budget slack’. For example, where
budgets are mainly set by simply adjusting last year’s figures, the existence of slack might be common
and become embedded within the budget estimates. This might be overcome partly by requiring man-
agers responsible for work units to justify their budget from scratch or from what is referred to as a ‘zero-
base’. While this is more time consuming it might help overcome budget slack in some circumstances.
1 For those seeking some further reading on this aspect of budgeting, Management control systems, 2nd edn, by K Merchant and
S Van der Stede would be useful.