Final MCS Anamika

8/8/2019 Final MCS Anamika

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Behavioural Aspect OfBehavioural Aspect Of

BudgetingBudgeting



Compiled by:Compiled by:

Tanmay gangwar 091202064Pratham Hegde 091202073

Nayana 091202057

Shanawaz 091202115Anamika Kanoi 091202047



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



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.



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.



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.



The Budgeting ProcessThe Budgeting Process



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.



Step 2: Communicating about the

Process

Clearly communicate responsibilities, expectations and deadlines to

everyone involved;

Explain and distribute forms and assumptions.



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.



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.



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.



Step 6:Committee Review

Have the finance committee and other appropriate staff and

board committees review a budget draft and key

assumptions;



Step 7: Final Approval

Board meeting held and budget proposal and programmatic

and fundraising assumptions are presented for approval.



Effects Of Budget On The Various

Parties Involved In An Organisation



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.



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.



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



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



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



Conflicting Role Of

Budgets



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.



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



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



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



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



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.



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.



In case 2, the budget isequal to N, and the

aspiration level and result

coincide with the budget;

the budget will not

influence performance



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.



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.



In case 5, the aspiration

level is easier than case

4.here the actual result

will be equal to the

aspiration level.



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.



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.



Bottlenecks in Allocating Budgets



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.



Example



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.



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



Types of Rewards

Opportunities

Exposure

Experience Praise

Allow flexibility in an employee's schedule



BIAS IN THE BUDGET PROCESS

REASON:

THE REWARD SYSTEM OF THE COMPANY

THE INFLUENCE OF THE COMPANY PRACTICES THE INSECURITY OF CERTAIN MANAGERS



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.



Thank you!!!!

Final MCS Anamika

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