Traditional budgeting has
been criticized for a long time now because of its inadequacy as a means of
management control. It was stated that the rapid changes in today’s business
environment renders a rigid approach to budgetary control obsolete. Although it
was argued that amongst the requirements of a more appropriate system, would be
the building in of accountability to explain the differences between actual and
planned performance. This demands a more immediate time frame of information
reporting. Thus, there is a need to implement strategic management and
budgeting. Some authors conceptualized that to be effective, budgets must be
aligned with the organization’s strategies, appropriate strategic planning, and
performance management processes introduced, and must involve processes that
are value based, consequential and continuous.
It was stated that most
organizations still treat the budgeting and strategic management processes
separately and also, a significant portion of small- and medium-sized enterprises
do not engage in strategic planning (Tim Blumentritt 2006). The motivation for this study also comes from
the work that investigated on the “roles of Budgetary Control System (BCS) as a
component of the Management Control System (MCS) in creating and sustaining
competitive advantage” and came up with a positive conclusion. They concluded
that though BCS could play a leading role in establishing an efficient MCS for
creating a sustainable competitive advantage, budgeting will not function in
isolation . “Instead, it can be used more effectively by strategically joining
it with emerging strategic oriented knowledge enterprise” (Herath and Indriani,
2007). from imports into the country. Thus, manufacturing companies need to
develop and implement a well-conceived strategic plan in order to be
competitive in the business environment. Manufacturing Industry. We believe
that a management framework built on this principle will be a source of
creating and sustaining competitive advantage which is translated as high
There are a large number
of definitions for management control present in the literature. The modern
view for management control system originated from the influential work of
Garrison and Noreen (2000) who suggested that for management control “those
steps taken by management that attempt to increase the possibility that the
objectives set down at the planning stage are attained and to ensure that all
parts of the organization function in a manner consistent with organizational
policies” .He mentioned in this paper, the term management control will be
defined as those sets of organizational activities which include: planning,
coordination, communication, evaluation and decision making as well as casual
processes aimed at enhancing the efficient and effective use of the
organizational resources towards the achievement of the organizational
objectives. We are treating budgeting as a tool used by management to
facilitate those activities which corresponds to our area of study. Anthony and
Govindarajan (2004) identified several aspects or activities of management
control namely: planning, coordinating, communication, evaluation,
decision-making and influencing.
1) Planning what the
organization should do. Planning could be viewed as budget preparation. With
planning the organization decides what to do and the responsibilities of its
different members. We might classify business plans as falling under one of the
following headings: operating or administrative plans.
i) Operating plans. These
are short-term plans which relates directly to the achievement of the firm’s
objectives. Thus the annual production and sales plans, as well as the plans to
finance them, would be examples of operating plans. As we will see, short-term
operating plans are taken up with the firm’s budgeting activities.
ii) Administrative plans.
These are ‘tactical’ plans concerned with the creation of the organizational
structure, under which budgets and performance levels can be determined for
2) Coordinating the
activities of several parts of the organization to assure alignments goals.
information such as strategy and specific performance objectives. Communication
could be done formally (by means of budgets and other official documents) and
informal through conversations.
4) Evaluating actual
performance relative to the standard and making inferences as to how well the
manager has performed.
5) Deciding what, if any
action should be taken. The next concept that we will be explained below is the
tool which we are using as a means of management control process i.e. Budget.
Over the past two decades
the word that has become the common currency in all managers’ vocabulary is
“budgets”. Budget is perhaps the most chosen course of action or in action by
the management and staff across all sectors. Management at all levels within
the public, private and the third sector have used the budget as their shield
or excuse when confronted or challenged about any decision. It’s not uncommon
to hear variations of the phrases “the budget doesn’t permit us to”, or it’s
not our budget”. Furthermore, management in some sectors may be forgiven for
believing their sole raison d’être has become budget preparation, budget
compliance and budget monitoring. So, what do we understand by the term
“budget”? David Frederick (2001) defines budget as
a plan that is measurable and timely.
For the purpose of our
study, we define budget as a quantitative statement for a defined period of
time, which may include planned revenues, expenses, assets, liabilities, and
cash flows that provides a focus for an organization, as it aids the
coordination of activities, allocation of resources, and direction of activity,
and facilitates control. some researchers defined budgeting system as a
combination of information flows and administrative processes and procedures
that is usually an integral part of the short-range planning and control system
of an organization.
From the definition of
budgets we distinguish three key components. Firstly, we recognize the planning
aspect of budget. The plan is regarded as the statement of intent or goal of
the organization. The second aspect is the measurability. This makes it
possible to measure the plan. The third component is time. It gives the
possibility to say if the plan is achieved.
The sub-heading below
explains problems and limitations faced with traditional budget since in our
study we intend to show how well and better budget can be used as a tool for
management control process.
There are two issues
traditional budget is faced with; the first issue is the accounting. The budget
process serves two functions. It serves to build the internal budgets for each
responsible center in the company and the roles up to form the external
earnings per share capital. Many managers who get involved in the budget
process generally only budget these amounts for the areas of their
responsibility. Many of these managers have major profitability responsibility
but never get to budget profitability. He further went to say that the internal
accounting at most companies was based on expense allocations. This antiquated
methodology is the underlying reason most management reporting systems are underutilized
and one of the impediments to improving the budgeting process (Gregory J Nolan,
The debates related to the role of budget
participation in organizations have attracted the attention of management
accounting researchers for decades. However studies examining the relationship
between budget participation and performance have found inconsistent results
ranging from positive relationship to negative relationship. Extensive research has investigated the effect of
budgetary participation mainly on satisfaction
and performance of subordinates. While the relationship between budget participation and satisfaction generally are found
to be significant , there exist inconsistency in the findings of empirical
research examining the relationship between
budget participation and performance. The results range from positive
relationship (Brownell and McInnes, 1986) to
negative relationship (Locke and Schweiger, 1979), while others reported unrelated
association. There are three decision making functions that budgets
provide; the planning, control and motivation function.
In this study, apart from planning role, budget is viewed as providing motivational role that may increase employee
performance. With budgets that are set, it is argued that the holders may be motivated to place more effort in
order to achieve the budget, thus lead to improve their
In this study, a goal setting theory is used
as a basis for the theoretical framework. Goal setting theory is based on a
principle that the goals that are set serve as the objectives that individuals
need to achieve. Individuals become motivated to place more effort and discover
related activities to be performed for goal achievement. The benefits of goal
setting have been proven in extensive laboratory and organizational settings
Budgets have a similar meaning to the concepts
of goals as budgets represent a goal to be achieved or to work within the
established boundaries (Searfoss and Monczka, 1973). With budgets, the actions
and steps taken by all the holders are directed towards achieving the budget
and consequently realizing organizational goals.
Budget variance information, for example, can
be used as a means of learning more about the possible alternatives and their consequences.
In this way budgets play a pro-active role in facilitating the effective implementation
of strategic change.
Indeed, it can be seen, itself, as an
integrative liaison device that breaks down the functional and hierarchical barriers
that inhibit information. To persist with diagnostic use when firms are
undergoing change is likely to have an adverse effect on the relationship between
strategic change and performance. It is thus expected that the relationship between
strategic change and the performance will be enhanced to certain levels when budgets
are used interactively. However, interactive budget use is not at all costless because
it requires more extensive involvement of top management employees in the
budget making process as well as increased interaction among other
organizational members.Therefore, interactive use of budget in an organization
is only likely to enhance performance when strategic change is relatively high
which means the benefits of interactive use will outweigh the costs in that situation..
In this setting there is little ambiguity concerning organizational priorities,
and the nature of the work is relatively stable, with established,
well-understood routines for performing tasks. It therefore becomes feasible to
factor strategic priorities into the specific objectives and also to communicate
those objectives downwards in the organization in the form of financial targets
(Bruns & Waterhouse, 1975). Budgets are effective for monitoring and
controlling behaviour in this situation. Hence, the major strength of financial
controls, such as budgets, lies in its ability to monitor reliably
organizational processes which are in a steady state.
It has been seen in various studies that the
relationship between budget participation and performance revealed inconsistent
findings. This study attempts to extend the previous research by developing a
more comprehensive model to provide better explanations which are related to
budget participation behavioral consequences. This study aims to examine
whether budget participation improve managerial performance in the presence of
the perceptions of organizational fairness and motivation. Even though many studies
have investigated the role of fairness perception in affecting attitudes and
behavior of employees, but in accounting literature only a few studies have
evaluated it systematically. As such, this study may provide more evidence in
evaluating fairness perception’s role in the contexts of management control
system in organization. Further, while most of the studies in fairness
literature assume that fairness enhances employees’ motivation, in accounting
literature no study have actually examined the relationship.
In short, this study proposed for the evaluation
of budget participation in organization. It may contributes to the existing
literature by offering new insight into the best process by which budget
participation best operate to increase managerial performance.
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