Beha viour al Aspect Of Beha viour al Aspect Of Budgeting Budgeting
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Behavioural Aspect OfBehavioural Aspect Of
BudgetingBudgeting
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Compiled by:Compiled by:
Tanmay gangwar 091202064Pratham Hegde 091202073
Nayana 091202057
Shanawaz 091202115Anamika Kanoi 091202047
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ContentsContents
Definition and process of budget
Significance of budget
Impact of budget on stakeholders
Conflicting role of budgets
Effect of budget levels on performance
Reasons for bias in budgeting
Bottlenecks of allocating budgets
Conclusion
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Learning ObjectivesLearning Objectives
To understand human behavior and their aspiration in relation to budget.
To study the impact of stringent budget on the stakeholders
To understand the concepts and process of budget.
To suggest measures to encourage the performance of people concerned
in relation to formulation of budget.
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W hat is Budget?
quantified plan relating to a given period.
Although Budgets are often stated in terms of money, they need not be,
and can also relate to quantities made and sold, numbers of employees to
be recruited, or weights of material to be consumed.
Quantification is important because it adds precision and Clarity to a plan.
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PURPOSE OF PURPOSE OF BUDGETINGBUDGETING
Planning:
Necessitates setting of goals and establishing actions needed toattain goals.
Organising: involves the allocation of resources.
Leading:
Two main aspects are communicating & motivating.
Controlling:
Process of setting standards, measuring current performance andtaking remedial action if needed.
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The Budgeting ProcessThe Budgeting Process
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Step 1: Planning the Process
Identify who will coordinate the budgeting process and which staff, board
members and committees need to be involved;
Agree upon key definitions, assumptions and document formats;
Set timelines and key deadlines;
Determine and schedule any training or key meetings.
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Step 2: Communicating about the
Process
Clearly communicate responsibilities, expectations and deadlines to
everyone involved;
Explain and distribute forms and assumptions.
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Step 3: Programmatic Goal
Setting
Determine program goals and objectives;
Project staffing requirements and salary and benefit
assumptions based on program goals;
Get board agreement on goals and assumptions.
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Step 4: Information Gathering
Research and gather information about income and expenses based on
program goals and assumptions;
Construct budget details by program;
Communicate regularly to avoid duplication of effort and to share
information and assumptions.
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Step 5:Compilation and Revision
Have one person compile all information, review it for
consistency and redistribute to everyone involved;
Leave plenty of time for review and revisions.
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Step 6:Committee Review
Have the finance committee and other appropriate staff and
board committees review a budget draft and key
assumptions;
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Step 7: Final Approval
Board meeting held and budget proposal and programmatic
and fundraising assumptions are presented for approval.
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Effects Of Budget On The Various
Parties Involved In An Organisation
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StakeholdersStakeholders
SUPPLIERS
In case of a stringent budget the production department (stores and
purchases) is under heavy pressure to control and reduce the cost. Due to
this it tries to curtail on the raw material consumption or else tries to
resort to compromising on quality.
The suppliers in this case may or may not agree to reduce cost which will
create issues regarding the budget.
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CUSTOMERS
The customers are also affected because of the company`sbudget .
If in case a stringent budget is prepared by the concerned
authorities, various aspects such as advertisement, awareness
, value added services, etc are not provided in the desirable
way to the customers which creates hassles for them.
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GOVERNMENT
Due to stringent budget policies the company may strive tocut down its tax liability which is unethical and would try to
reduce it to the extent possible.
This might affect the government which is considered as one
of the stakeholders of the company
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INVESTORS
Budget plays a very important role for the investors as theirexpectations are linked to the overall performance of the
organisation .
The increase in performance of the company leads to an
increase in its investor base thereby leading to an increase in
the value of the firm and its shares
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EMPLOYEES
The employees are affected heavily if the budgets assigned tothem are strict in nature.
This might lead to development of a negative attitude from
the employees which would further lead to the downfall of
the company
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Conflicting Role Of
Budgets
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Tight budgets should be established to motivate maximum performance,
although this may mean that the budget will not be achieved.
However, tight budgets that are unlikely to be achieved are most
unsuitable for cash budgeting and for harmonizing the company plans in
the form of a master budget.
Because of this conflict separate budgets should be used for planning and
for motivational purposes.
The counter argument to this is that budgetees may react unfavourably to
a situation where they believe that one budget is used to evaluate their
performance and a second looser budget is used by top management.
It is unlikely that one set of budgets can, at the same time, meet both the
planning and the motivational requirements.
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Managerial Use budgets In PerformanceManagerial Use budgets In Performance
E valuationE valuation
Study conducted by Hopwood(1976)
Three distinct styles of using budget were
recognized:
budget-constrained style
Profit-conscious style
Non accounting style
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OBSERVATIONS $ FINDINGS
Accounting data showed the performance on
a quantitative scale ignoring the long term
costs
Both budget constrained style and profit
conscious style were better as compared tonon accounting style
Profit conscious style concentrated on
attaining the budgets without incurring anyemotional or undesirable behaviour
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contd.
Budget constrained style created worry and a
feeling of unjust among the employees
Budget constrained style may at times involvemanipulation and mal practices being adopted
by the managers and their unit memebers and
there is a high focus on short term benefits
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PARTICULARS BUDGET
CONSTRAINED
STYLE
PROFIT CONSCIOUS
STYLE
NON ACCOUNTING
INVOLVEMENT
WITH COSTS
HIGH HIGH LOW
JOB RELATED
TENSIONS
HIGH MEDIUM MEDIUM
MANIPULATION OF
ACCOUNTING
INFORMATION
EXTENSIVE LITTLE LITTLE
RELATION WITH
SUPERIORS
POOR GOOD GOOD
RELATIONS WITH
COLLEAGUES
POOR GOOD GOOD
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The Effect Of Budget Levels On aspiration
level and Performance.
Hofstedes Research(1968) provides an insight into the effect
of budget levels on the aspiration level and performance.
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In case 1, the budget is too
loose (above N). The
budgetee will not find itdifficult and will set a
higher aspiration level. The
result R will be equal to the
aspiration level.
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In case 2, the budget isequal to N, and the
aspiration level and result
coincide with the budget;
the budget will not
influence performance
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In case 3, the budget is
below N, and the
budgetee responds by
altering his aspiration
level to below N but not
to budgeted level of
expenditure. The actual
result will be equal to
aspiration level.
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In case 4, here there is an
improvement in aspirationlevel. But since the budget
and aspiration level, there is
a strong possibility that the
actual result will not be as
good as aspiration level. A
higher level of performanceis achieved here.
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In case 5, the aspiration
level is easier than case
4.here the actual result
will be equal to the
aspiration level.
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In case 6, the budget is so
tight that the budgetee will
regard it as impossible. The
effect of this approach is
that the actual result will
be worse than that which
would have been achieved
had no budget been set.
In case 1 and 6 budgets
do more harm than
good, andimprovements occur
only in case 3 and 4.
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Hofstedes conclusions concerning budget difficulty were as follows;
Budgets have no motivational effect unless they are accepted bythe managers involved as their own personal targets
Up to the point where the budget target is no longer accepted, themore demanding the budget target the better results achieved.
Demanding budgets are also seen as more relevant than lessdifficult targets, but negative attitudes result if they are seen toodifficult.
Acceptance of budgets is facilitated when good upwardcommunication exists.
Managers reaction to budget targets was affected both by theirown personality and by more general cultural and organisationalnorms.
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Bottlenecks in Allocating Budgets
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Applying managerial motives of the firm theory, managers cannot obtain their self-
vested interest as well as those of the firm without a hefty budget to implement
acquisition and other diversification strategies. such mentioned strategies require
physical, financial and organizational resources.
Departmental networks also often argue about appropriation of annual budgets
for their specific causes.
When budgets fail to meet expectations of such units, it may result to reduced
motivation and even firm rebellion particularly against the finance division.
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Applying performance budgeting to these instances can mitigate the destructive
speculation of excessive/ meager budget allocations.
Managers will be periodically audited in the post-expansion implementation.
This budgeting system is result-oriented, it should be coupled with ethical
committee oversight to regulate unacceptable level of immorality to obtain
intended results.
Allocation of the budget and selecting the appropriate model should be inferred in
firm specific aspects in order to identify motivational points.
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REWARDING EMPLOYEES ON A BUDGET
Everyone likes to get a pat on the back for a job well doneespecially if that pat
includes some type of bonus or other financial compensation or recognition before
colleagues.
steps to design an effective employee rewards program:
Identif y what you want to reinf orce
Motivate your employees
Make sure it works f or the company
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Types of Rewards
Opportunities
Exposure
Experience Praise
Allow flexibility in an employee's schedule
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BIAS IN THE BUDGET PROCESS
REASON:
THE REWARD SYSTEM OF THE COMPANY
THE INFLUENCE OF THE COMPANY PRACTICES THE INSECURITY OF CERTAIN MANAGERS
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Conclusion
Partial fulfillment of the set objectives.
There is a significant relationship between
budget level ,aspiration level and performance
Manipulations happen due to unimaginary
and unattainable targets.
An organisation cannot serve both
motivational and planning aspects
simultaneously.