HOW MANAGERS’ BEHAVIOURS ARE AFFECTED BY BUDGETING
According to Hopwood (1974), there are three different styles of budgeting information that managers would get evaluated on. The first one is non-accounting, in which managers are not judged based on accounting figures but qualitative factors. The second one is profit style, which means that managers would focus on maximising profit and reducing cost in the long term.
Explain more about the Hopwood style:
1. Profit conscious style: focus on increasing profit and reducing cost in the long term.
The possible managers’ behaviours for this style are that managers would not be put under pressure, which would enable them to create a friendly working atmosphere between colleagues. Furthermore, they only focus on long term profit but not short term performance, therefore they would not have motivation to manipulate the accounting data.
2/ Non-accounting style: the performance is evaluated based mostly on qualitative factors such as consumer satisfaction, quality and timeliness.
As this style is similar to the profit conscious style (both emphasise the profit in long run), thus the managers’ behaviours is similar as well. The main difference is that managers would take the accounting information less seriously and pay more attention on the qualitative factors.
3/ Budget constrained style: managers are required to follow the pre-set budgets, which means that they are evaluated on short term performance.
Because of the pressure to reduce cost as much as possible within a short period of time, managers are often more stressful and so lead to causing employees not working well together. The focus on short-term profit also encourages managers to do anything to better their performance in that period without caring about the return in the long run.
In the DFS case, it is clearly that managers are subjected to budget constrained style, as they are forced to follow the pre-determined budget from Mr Abbas and Mr Jones in order to not get penalised. Therefore, it is expected that managers will be under hard pressure, which they would put on their direct employees instead. This consequently causes poor working environment and affects the relationship between colleagues. Furthermore, the focus on minimising cost in short term may make managers sacrifice long-term profit to achieve the current target. More importantly, it can lead to managers manipulating accounting figures in order to better their performance. (underlined: the possible negative behaviours of managers in budget constrained style)
Also in the case, Mr Abbas and Mr Jones have decided not to let managers participate in the budgeting process anymore but only the directors make the decisions. This would cause difficulties for managers since the directors may not understand all the costs involved in the operation. If the budget is set too low at the level that managers would not be able to follow it; then they would just agree to get penalised (Hofstede, 1968). Therefore, even though the Managing Directors want to minimise the budget, it still has to be over the lower limit. Furthermore, demanding budget is also considered to be more effective in motivating managers than less difficult one, so the upper limit is important as well. In brief, in order to encourage the managers comply with the budget, it has to be at the level which is not only too hard to give up but also sufficient to motivate managers.
MITIGATING DYSFUNCTIONAL BEHAVIOURS
As discussed above, when the budget is too tight, managers would commit in dysfunctional behaviours such as manipulating the cost figures to improve performance. Therefore, the most essential action is constructing a reasonable budget (a sufficient level of cost so that managers can keep up with and also find not easy). To do so, instead of using the top-down budget, managers can try another style. If they do not want to apply the participative budget due to the waste in preparing time and possible conflicts, the negotiated one, which is the mix between two styles, would be fine. (Top-down budget: the CEO would set the budget and force everyone to follow without excuses just like in the case; participative budgeting: managers in each department are required to prepare the budget on their own which would be checked and approved by CEO later)
Using this style, managers would be able to express whether they think the budget is appropriate and which sections should be adjusted. In addition, to make the budget more flexible, the directors could allow managers to exceed the budget within a limit if they have acceptable explanations, instead of penalising them immediately. Flexibility is important because in the operating process, there would be some unexpected problems which require managers to have immediate actions. If those actions are constrained by the budget, managers may not try their best to save the situation and would result in losses for the companies.
Furthermore, the interaction between departments is essential as well. In the case that the budget is set strictly, managers tend to not care about the other departments’ activities but focus only on reducing their own costs. Thus, it may cause difficulties for other departments. (Example: inventory department purchase low-quality stock to save cost, which cause problems in customer satisfaction so the sale department needs to promote more on the products). In brief, the management has to identify the main cause of exceeding budgeting to have a reasonable award system for each departmental manager to ensure that it will not cause unequality to any of them.
ZERO-BASED BUDGETING
Zero-based budgeting is a technique in which all the costs and revenues suggested in the budget would be reviewed and approved by top management. Therefore, the budget has to be constructed carefully and in complete details. Based on the description, it can be seen that zero-based budgeting is more concise and effective in allocating resources in order to improve operations. Furthermore, it also identifies chances to remove or change any ineffective departments to reduce costs. However, as it bases on zero previous details, both the preparing and checking process will take long time and lots of effort to finish, therefore, it may cause the costs to finish the budget much higher. Additionally, in case that the budget is too complicated, managers to resize it into more simple file which could eliminate important sections. Finally, zero-based budgeting is relatively hard to understand; consequently managers need to be trained to successfully implement it into practice. (yellow: advantages; green: disadvantages)