Forecasts and Budgets 181Many companies have intricate budget performance reporting systems in
place, but the firms achieve little control from their use. In order to provide
effective control, a business must use the budget as an integral part of the com-
pany’s reward system. That is, employees must understand that budget perfor-
mance reports are a component of their performance evaluation. Rewards such
as pay raises, bonuses, and promotions should be tied to budget performance.
Generally it is easy to determine if a company’s budget performance re-
porting system is working effectively. If, on one hand, discussions with man-
agers yield comments such as, “If we fail to achieve the budget, we just add
more to it next period,” the budget-control process is likely ineffective. If, on
the other hand, employees say, “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 effect.
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 is 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 mar-
keting department requests 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.” Of course, 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 out-
weigh the cost. Management should be careful not to undermine the budgeting
process by assigning to it adverse characteristics.
Behavioral Issues in Budgeting
Many of the internal accounting reports firms prepare are intended to inf lu-
ence managers and employees to behave in a particular way. For example, many
manufacturing cost reports are intended to enable and motivate employees to
reduce costs or keep them at an acceptable level. Similarly, reports that com-
pare the performance of one division with those of other divisions 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 in-
ternal accounting reports businesses use to inf luence employee performance in
a positive manner. Budget control is based on the principle that managers be
held responsible for activities they manage. Performance reports ref lect the