Departmental Self-centredness

The budget process which involves defining areas of responsibility, measuring and comparing performance accordingly, concentrates the manager's entire attention on his own department. The tendency to departmental self-centredness which is thus encouraged obscures the important relationships between departments, so that inter-departmental dependencies may be ignored or overlooked in the quest for optimizing departmental results. Consequently, economies which would result from greater inter-departmental collaboration may be lost to the organization.

The stifling of initiative

The planning and control aspects of budgeting may be over-emphasized within an organization with the result that opportunities for the exercise of personal initiative may be excluded. Budgets which appear to be strait-jackets discourage managers from deviating from budget stipulations even when circumstances indicate that individual action should be taken. It has been noted, for example, that employees who were subject to audit procedures conformed closely to company policy even when more efficient alternatives were available (Churchill, Cooper and Sainsbury, 2004).

Bias in budgeting

In the last analysis, the process of setting budget targets may be said to be a matter of making subjective judgements, and as a result, bias may inevitably be found in the budgeting process in a conscious or unconscious form. Managers may inflate costs and reduce revenue expectations when setting budget targets, thereby ensuring that they are more readily achievable. In this way, the introduction of conscious bias is a deliberate means of ensuring that their performance as managers will be highly evaluated.

The introduction of bias into estimates that find their way into budget standards typifies the behavioural responses of individuals to organizational pressures. Take the example of a salesman threatened with the possibility of redundancy as a result of falling sales. In such circumstances, he may well find it to his advantage to make optimistic forecasts of sales expectations in his area. By contrast, he may make pessimistic forecasts of achievable sales if his bonus and his performance is evaluated in terms of the extent to which he improves upon the budget target.

The presence of bias in setting budget targets may be met either through the process of counter-biasing, which leads to gamesmanship in budgeting, or by reducing ignorance or fears about the objectives of the firm in relation to personnel. The reduction of conflict between the firm's objectives and the objectives of managers and personnel is discussed later, when the system known as Management by Objectives is discussed.

Budget information and performance evaluation

According to Hopwood (2003, 2004), budget information may be used in three different ways for the purposes of assessing managerial performance, as follows:

(1) Budget constrained evaluation, where the manager's performance is primarily evaluated on the basis of his ability to continually meet budget targets on the short-term basis,

(2) Profit-conscious evaluation, where the manager's performance is evaluated on the basis of his ability to increase the general effectiveness of the operations of his unit in relation to the long-term objectives of the firm. In this case, budget information will be used with a degree of flexibility.

(3) Non-accounting evaluation, where budget information plays a relatively small part in the evaluation of the manager's performance.

Interested in Appraisals

Read on: Poor Communication

Where a Theory X style of management exists, negative attitudes may be generated against organizational goals which may lead to faked budget results and the unwillingness to transmit information. Managers will feel that their own survival justifies these tactics.

The prevalence of negative behaviour in an organization which practices management by domination may be aggravated by the response of top management, when it is realized that information which is needed for decision making is not transmitted. Their immediate reaction may be to impose even tighter controls, which will reinforce the... see: Poor Communication