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Management Accounting Fundamentals

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Participation in the budgeting process is often hailed as a motivator for improved performance outcomes, however, some authors have suggested that forced participation may fail to empower or motivate employees and may even result in a diminution in performance.

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Management Accounting Fundamentals

  1. 1. 1 Management Accounting Fundamentals Participation in the budgeting process is often hailed as a motivator for improved performance outcomes, however, some authors have suggested that forced participation may fail to empower or motivate employees and may even result in a diminution in performance.
  2. 2. 2 Table of Contents 1. Introduction.............................................................................................................................. 3 i. Better Understanding of Tasks and Targets......................................................................... 3 ii. Setting of Attainable Goals.................................................................................................. 3 iii. Positive Attitude towards the Budget .................................................................................. 4 iv. Lesser Resistance to Change................................................................................................ 4 v. Innovation is Encouraged..................................................................................................... 5 2. Argument against the Topic..................................................................................................... 5 i. Cost Concerns ...................................................................................................................... 5 ii. Time Consuming.................................................................................................................. 6 iii. Limited Knowledge of Employees ...................................................................................... 6 iv. Clashes and Conflicts........................................................................................................... 7 v. No Connection ..................................................................................................................... 7 3. Conclusion............................................................................................................................... 7 4. Bibliography ............................................................................................................................ 8
  3. 3. 3 1. Introduction Due to the trend in favor of increased participation that organizations all around the world are following, there is also a distinct pressure for allowing employees to participate in key decision making efforts of the organization. Budget formation and monitoring is one of the most important financial decisions of any business. Employees are increasingly active in the process. There are many reasons why organizations encourage their employees to actively participate in the formation of budgets. This participation allows for a number of advantages that work in the best interests of the organization as a whole. i. Better Understanding of Tasks and Targets If employees are encouraged to participate in the budget formation, they will have better understanding of their tasks and targets (Parker & Kyj, 2006, pp.27-45). This means that they will be informed beforehand about what is expected from them. When an employee knows his tasks and is knowledgeable of the criteria that he/she has to meet, he may have a clear focus and sense of direction when he works. This clarity will increase the degree of certainty in the work place, hence increasing motivation. Many different works of literature support the idea that availability of information regarding job targets in monetary terms not only gives a clear focus, but also helps in increasing work performance. ii. Setting of Attainable Goals Only an employee would know what is attainable for him or her. In many instances, senior managers may decide for other people working under them with the hope that they would be able
  4. 4. 4 to meet their targets. However, this approach is often inaccurate as many employees find it next to impossible to reach those targets, which are often seen as unrealistic. Chong & Johnson (2007, pp.3-19) suggested that if employees participate in the drawing up of the budget, they will be able to formulate realistic and attainable targets for themselves which are also challenging. This is a great advantage of participation in the budgetary process, because it decides the fate of the tasks and targets to be met. iii. Positive Attitude towards the Budget Some authors suggest that if the employees actively participate in the formation of the budget, they will have more confidence in the fairness and relevance of the budget. They will view their targets as being realistic and attainable, as Subramaniam & Mia (2001, pp.12-29) put it. This is because employees were themselves active participants of the process, thus they perceive the budget as their own production and feel more compelled to fulfill the targets and expectations that have been drawn for them by themselves. They will have more confidence in the budgetary targets set for them and will show a positive attitude. This will increase their motivation levels and will also reflect well on the overall organizational morale and performance. iv. Lesser Resistance to Change Budgets are an important component of organizational change. The first effects of change will show on the budget. One important example is of cost-cutting practices that organizations adopt during times of recession. Cost-cutting has its impact on the budget, which obviously shrinks and this means major change for everyone. In such a case, where the whole organization is affected
  5. 5. 5 by change, it is important to involve the employees in the process that creates the change: the budget formation. Authors, like Shields & Shields (1998, pp.49-76), believe that if employees have participated in making the budget, they will be less resistant to change. v. Innovation is Encouraged Budget formation is a stringent and long process. It may become very repetitive with time and may lose its effectiveness if it cannot change according to the changing environmental conditions. By employing the ideas given by a range of people from different backgrounds, educational experiences and other situational factors, the chances of incorporating new ideas and helping the organization become more agile and resilient increases. Innovation is often seen to increase in organizations that encourage employee participation in budget making, as is the view of (Dunk, 1995, pp.75-85). 2. Argument against the Topic These advantages of allowing increased participation of employees in the budget formation are numerous; however, there is an equally strong opposition to the idea of more participation. This view criticizes the basic idea of collecting the views of many different people and trying to find a common ground among them. i. Cost Concerns Budget formation is usually done multiple times in a year or at least annually, in most companies. The frequency of this activity suggests that it can be very costly to carry out. The
  6. 6. 6 importance of a budget is immense; hence, any mishaps cannot be ignored. In such a scenario, organizing a platform for a large number of employees to collect and share their views can be a very expensive task to do. This would mean several work hours wasted and huge meetings whose cost the company would have to bear. Even after the budget has been formed, it will require proof checking and verifications, which would cost even more. Hence, adding more people to the process would only make it more expensive. ii. Time Consuming Time is money for any organization. Making a budget with the participation of employees means that a lot of time will be consumed in collecting everyone at one occasion and then holding discussions. Not surprisingly, the discussions will require a lot of time. This would unnecessarily delay the time frame of the budget formation, leading to delays in other activities that are dependent on the budget. Screening ideas and then short-listing the most viable ones takes a lot of time. Disagreements will also waste time as people with different opinions will inevitably try to antagonize each other’s points of view. iii. Limited Knowledge of Employees Many employees have a limited knowledge and understanding of their company’s operations and activities. This is especially true if the organization is vast and has many different business units or geographical divisions. In this case, it is very difficult for a middle tier employee to make an informed and valid decision regarding the budget. When the company mission and vision and growth prospects are unknown to most employees, it is best to leave the budget formation to the top-management that has a clear strategic focus in mind and can more effectively draw a budget.
  7. 7. 7 iv. Clashes and Conflicts As employees have limited knowledge and no one department would be able to have an accurately holistic view of the whole organization, there would be clashes among different people. Since the budget is a limited commodity, departments would compete among themselves for a larger chunk of the budget because they think their operations are most important for the organization. This way of thinking often creates serious conflicts among departments and ends in deadlocks. A lot of time and resources are used in resolving these clashes and coming up to a suitable conclusion that is bearable for all. v. No Connection Some authors, like Kenis (1979, pp.702-721), have gone as far as commenting that there is no clear connection between participation in budget formation and employee performance. They hold the view that participating in the budget formation has no impact on the employee motivation level or job perception. However, some authors have also suggested that the effect may be negative, for example Bryan & Locke (1967, 274-277), the opposition to this view blames faulty research methods and mechanisms that lead to this conclusion. 3. Conclusion Thus, it can be said that the case for and against participation in budget formation has equally viable arguments. The validity of the practice depends on the type of organization, culture, size and other factors.
  8. 8. 8 4. Bibliography Bryan, J. F. & Locke, E. A. (1967). Goal setting as a means of increasing motivation. Journal of Applied Psychology, (June), p. 274-277. Chong, V. K. & Johnson, D. M. (2007). Testing a model of the antecedents and consequences of budgetary participation on job performance. Accounting and Business Research, 37(1), p. 3-19. Dunk, A. S. (1995). The joint effect of participative budgeting and managerial interest in innovation on departmental performance. Scandinavian Journal of Management, 11(1), p. 75-85. Kenis, I. (1979). Effects of budgetary goal characteristics on managerial attitudes and performance. The Accounting Review, (4), p. 707-721. Parker, R. J. & Kyj, L. (2006). Vertical information sharing in the budgeting process. Accounting, Organizations and Society, 31, p. 27-45. Shields, J. F. & Shields, M. D. (1998). Antecedents of participative budgeting. Accounting, Organizations and Society, 23(1), p. 49-76. Subramaniam, N. & Mia, L. (2001). The relation between decentralized structure, budgetary participation and organizational commitment: The moderating role of managers’ value orientation towards innovation. Accounting, Auditing & Accountability, 14(1), p. 12-29.

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