BUDGETARY CONTROL

BUDGETARY CONTROL
• Control consists of steps taken by
management to see whether the planned
objectives are being met or not.
• Budgetary control is the use of budgets in
controlling the operations.
PLANNED ACTUAL
OBJECTIVES COMPARE RESULTS
 BUDGETARY CONTROL
• Involved:
– Develop budget
– Analyse differences between actual and budget
– Take corrective action
– Modify future plans.
 FEEDBACK VS FEED-FORWARD
FEEDBACK FEED-FORWARD
Monitoring actual output Making predictions of what
against desired outputs and outputs are expected to be at
taking corrective action if there some future time
is deviation

Actual errors are identified Likely errors can be anticipated

after the event and take and take steps to avoid them
corrective action to implement
future actions
 MOTIVATIONAL & ETHICAL
ISSUES OF BUDGETING
• Motivation is the drive in the employees’ attitude
needed to expedite operations based on budget.
• Ethical issues involve honesty and trust of the
employees when exercising their responsibilities.
• Any action which goes against this will cause
dysfunctional behavior.
BEHAVIOURAL ISSUES OF BUDGETING

1. Participative budgeting

2. Budgetary slack

3. Budget difficulty
 1. PARTICIPATIVE BUDGETING

Top-down
Participative budgeting
budgeting Bottom-up
budgeting
Managers who are held accountable
for budget performance help to
develop their own budget estimates
 TOP-DOWN BUDGETING
(IMPOSED APPROACH)
Budget set at
A cost effective and
corporate level and
timely way of setting
cascaded down to
budgets
responsibility centers

Budget targets may not

Little participation or represent the
consultation appropriate knowledge
and may be unrealistic

Senior managers TOP-DOWN Lack of commitment of

impose budget targets middle and junior
on junior managers BUDGETING managers
 BOTTOM-UP BUDGETING
(PARTICIPATIVE APPROACH)
Encourage coordination Greater understanding
Enhanced accuracy of
and communication and appreciation of the
budget estimates
between managers objectives and strategy
of the wider
organization
Budgets are collected Expensive, time
at lowest level and fed consuming,
up to senior indecisiveness and
management delay

People at lower BOTTOM-

managerial level and Possibility of padding
operational level set
UP the budget
their own budget BUDGETING
2. BUDGETARY SLACK

Padding the budget is a practice that is used

in business when submitting a budget for
approval

Artificially inflates the proposed budget in

order to give the project room to expand or
to cover unexpected costs

Budget padding will result in budgetary

slack which is the difference between the
revenue or cost projections and a realistic
estimates
 REASONS FOR CREATING
BUDGETARY SLACK

To ensure performance look good

To cope with uncertainty

Competing for limited resources

 HOW TO SOLVE
THE BUDGETARY SLACK ISSUE?

Give incentives to
Do not use the budget achieve budgetary
as a negative projections and to
evaluation tool provide accurate
budget estimates
 3. BUDGET DIFFICULTY
• As the budget target increases, then performance will also increase,
up to a certain point. At a relatively low level of budget difficulty,
actual performance is likely to remain low, even though it may
exceed the budget target. Budgets that are not challenging may be
suitable when the prime purpose of budgeting is forecasting, but
they do not motivate high performance. As the difficulty of the
budget increases, the individual’s performance may increase in an
attempt to attain the higher targets. However, when the budget is
regarded as too difficult, performance will decrease because when
it is just too hard, the individual will tend to give up.

• Optimal performance is likely to occur when a budget provides

sufficient challenge and stretch but is still considered achievable. In
addition, budgets that are set to challenge may not always reach
their target, so they are not suitable in situations where accurate
forecasting is a major concern.
 GOAL CONGRUENCE
Frequent feedback
on performance
Employees are held
Targets are
responsible for activities
considered
that they believe are within
achievable
their control

Achievement of
Targets are
targets is
developed with the BUDGET
accompanied by
participation of ACCEPTANCE
rewards that are
employees
valued.