Budgeting is a major area of management accounting and receives a lot of interest from
researchers who mainly concentrate their studies on the design of budget schemes and the
process of setting budgets. Concerning the use in practice, a survey of senior managers in 219
publicly traded firms indicated that “75 percent thought of the budgetary process as a managerial
rather than an accounting function” (Zimmerman, 2009, p. 250). However, the effects of budgets
and budget processes on managerial performance and effort are still not clear.
This paper aims at providing an overview of a collection of recent research papers to investigate
how different types of budgets influence managerial behavior and performance and what
implications these findings have for managerial practice. Therefore, in the first section the general
role of budgeting in organizations will be described. Next, different types of budgets and budget
levels are introduced and their effects on managerial behavior and performance will be examined.
Finally, several implications of those effects for managerial practice will be given, before a
conclusion wraps up the main points of this report.
Table of Contents
1. Introduction
2. The Role of Budgeting in Organizations
3. The Effects of Different Types of Budgets and Budget Levels on Managerial Behavior and Performance
3.1 Participatory Budgeting
3.1.1 Individual Level
3.1.2 Group Level
3.2 Activity-Based Budgeting and Beyond Budgeting Approaches
3.2.1 Activity-based budgeting
3.2.2 Beyond Budgeting
4. Implications for Further Research and Managerial Practice
4.1 Type of Budget
4.2 Design of Internal Reporting System
4.3 Managerial Control System and Organizational Design
5. Conclusion
Objectives and Research Focus
This report provides a comprehensive review of recent academic literature to analyze how various budgeting models impact managerial behavior and performance, aiming to translate these findings into actionable insights for modern organizational practice.
- The influence of participatory budgeting on information sharing and performance.
- Trade-offs between budgeting for planning versus performance control.
- The effectiveness of group-based compensation and incentive structures.
- Comparative analysis of traditional budgeting against Activity-Based and Beyond Budgeting approaches.
- Managerial strategies for optimizing organizational reporting and hierarchy designs.
Excerpt from the Book
3.1.1 Individual Level
The most prevalent effects of budgets on managerial behavior and performance relate to the control role of budgeting. It is common criticism that traditional budget-based compensation plans encourage managers to understate their productivity and build slack into their budgets to increase their pay-off, as described above. This, in turn, decreases the company’s profits due to “costly planning errors and greater compensation or perquisite consumption for subordinate managers” (Fisher et al., 2002, p. 848). However, the authors argue that firms are still widely using budget-based compensation plans. This contradiction can be explained by the interdependent effect of decision making and control. Specifically, the article proves that using budgets to allocate scarce resources (planning) can mitigate the negative effects of budget-based compensation (control) which leads to significant increases in subordinates’ initial budget proposals and performance as well as lower budget slacks. Specifically, the authors find that subordinates’ task performance increases by 25% due to higher motivation in receiving scarce resources and exceeding budget targets. Hence, “the tension between these two roles [planning and control] can be beneficial” (Fisher et al., 2002, p. 862-863).
Summary of Chapters
1. Introduction: Outlines the significance of budgeting in management accounting and defines the paper's objective to examine the effects of budget types on behavior and performance.
2. The Role of Budgeting in Organizations: Discusses the dual function of budgets in planning and control, highlighting the importance of information sharing and the challenges of participative budgeting.
3. The Effects of Different Types of Budgets and Budget Levels on Managerial Behavior and Performance: Analyzes how budget levels and participation influence individual and group performance, while contrasting traditional methods with Activity-Based and Beyond Budgeting models.
4. Implications for Further Research and Managerial Practice: Offers practical guidance for managers on budget design, internal reporting, and organizational hierarchy based on the analyzed research.
5. Conclusion: Summarizes the key findings, noting that while practitioners often view traditional budgeting as outdated, it remains an indispensable tool that requires adaptation rather than abandonment.
Keywords
Budgeting, Management Accounting, Participatory Budgeting, Performance Evaluation, Information Asymmetry, Managerial Behavior, Activity-Based Budgeting, Beyond Budgeting, Resource Allocation, Budget Slack, Organizational Design, Reporting Systems, Incentives, Planning, Principal-Agent Theory
Frequently Asked Questions
What is the primary focus of this research paper?
The paper examines how different budgeting models and levels of participation affect managerial performance, decision-making, and organizational behavior.
Which central topics are discussed in the work?
Key topics include participative budgeting, the trade-off between planning and control, incentive structures, and alternative approaches like Activity-Based and Beyond Budgeting.
What is the ultimate goal of the investigation?
The goal is to analyze academic research to identify how budgeting practices influence managers and to derive recommendations for improving managerial practice.
Which scientific methodology does the author use?
The author employs a literature review methodology, synthesizing recent research papers and case findings to identify trends and managerial implications.
What does the main part of the report cover?
The main section investigates the specific effects of budget types on performance, differentiates between individual and group-level budgeting, and evaluates practitioner-led alternatives.
Which keywords characterize this report?
Key terms include budgeting, managerial performance, information asymmetry, participatory budgeting, and performance evaluation.
How does the author evaluate the "Beyond Budgeting" approach?
The author recognizes the theoretical benefits of decentralization and flexibility in the Beyond Budgeting approach but warns that its feasibility and practical implementation remain challenging and require further empirical evidence.
What role does "information asymmetry" play in the budgeting process?
Information asymmetry is central to the discussion; the paper highlights how participative budgeting can help superiors reduce this asymmetry, though it can never fully eliminate the incentives for subordinates to create budget slack.
- Arbeit zitieren
- Christoph Butz (Autor:in), 2010, Role and Effects of Budgeting in Managerial Practice, München, GRIN Verlag, https://www.hausarbeiten.de/document/176624
