BEHAVIORAL ASPECTS OF BUDGETING

Behavioural Aspects of Budgeting

Definition

The focus of behavior is the degree of participation in developing the master budget that senior management is willing to delegate to midlevel managers and lower. This has become one of the most significant aspects of the budget process because in reality the approved budget represents a consensus and a compromise reached between many people within the organization. The agreement between these individuals reflects a self-imposed commitment to achieving the budgeted goals they have set collectively. In fact, current literature seems to support the notion that the modern budget process has become a process focused on participation (Nancy, Mark, Simkin & Carolyn, 2008).

In the traditional budget process the budget prevailing authoritarian or totalitarian. In this situation, each and every game of the master budget is specified by top management with the expectations that middle managers and under are responsible for achieving exactly what upper management has imposed. There is no provision in this budget process for managers of medium or low take initiative. Senior management strictly determined, and then the expected performance will be closely monitoring actual performance to ensure the provisions.

Traditional Top Down Budgetary System

The Top-down is based on collecting the judgment and experiences of top and middle managers. These cost estimates are then given to lower level managers, who are expected to continue the breakdown into budget estimates. This process continues to the lowest level (www.deloitte.com).

The advantages of this budgeting are that aggregate budgets can often be developed quite accurately. Budgets are stable as a percent of total allocation and the statistical distribution is also stable, making for high predictability. The experience and judgment of the executive accounts for small but important tasks are to be factored into the overall estimate.

Incremental Budgetary Systems

The incremental budget (or traditional) have two specific characteristics. First, funds are allocated to departments or units of the organization. The managers of these units in turn allocate funds to activities they deem appropriate. Second, an incremental budget is based on the previous budget. The budget for each period starts by using the previous year. The budget for each period starts using the previous year as a benchmark. Only incremental changes in the budget are reviewed. Each of these features, however, poses a problem. When funds are allocated to organizational activities, it is difficult to distinguish the activities within the units, because the organization generally have a multiple series of ...