BUDGET PARTICIPATION AND COMPANY PERFORMANCE

Effect Of Budget Participation On Company Performance

Abstract

This study investigates the relationship between budget participation (BP), cost management knowledge and company performance. It draws on relevant previous research in the theory of work performance and accounting to formulate the research questions. Eighty-three managers from Finnish companies participated in the study. Data were collected from the managers using a mail questionnaire. The results indicate that managers' cost management knowledge, and especially the balanced perspective of cost management knowledge, moderates the effect of BP on self-perception of company performance. It was specifically found that the effect of BP on perceived company performance becomes more positive when managers' cost management knowledge increases. High perception of company performance is obtained when both the BP and managers' cost management knowledge are high. Our results suggest that organizations should improve the cost management knowledge of managers who participate in the budgeting process.

Effect Of Budget Participation On Company Performance

Chapter I: Introduction

Although participative budgeting has been one of the most exhaustively researched areas in behavioral management accounting research, surprisingly few individual related variables have been researched in relation to budget participation (BP) and company performance. One of the earliest works in this area, by Hopwood (1972), indicated that managers use three different styles of budget and actual cost information in the evaluation of company performance. Otley (1978), however, was unable to replicate these results. The differences in these two studies have prompted researchers to examine a variety of individual variables (see Briers and Hirst, 1990). Understanding the role of the style of cost management knowledge may play an important role in subordinates' understanding of the use of budgetary information in performance evaluation. None of the earlier studies, however, has attempted to address how the style of cost management knowledge (hereafter cost management knowledge) affects the relationship between BP and performance. Yet, this issue is highly relevant.

Therefore, it is appropriate and necessary to ask questions such as: does the effect of BP on company performance change depending on the style of cost management knowledge? Does the effect of BP on company performance increase when the level of cost management knowledge increases? In other words, does BP interact with managers' cost management knowledge to affect company performance and, if so, what form does the interaction take?

There is a growing body of research that suggests that considerations of managers' ethical judgment may play a role in budgetary setting (Luft, 1997; Douglas & Wier, 2000). The research presented in this chapter tests the moderating effect of multidimensional measures of manager's ethical judgment on the relationship between budget participation and budget slack. Experienced managers responded to four hypothetical scenarios related to their ethical judgments that are expected to moderate the relationship between budget participation and budget slack. Overall, the results suggest that the relationship between budgetary participation and budgetary slack is moderated by manager's ethical judgment. However, it was surprising that, although they are in the predicted direction, the moderating effects of moral equity (scenario A) and relativism (scenario B) ...