Behavioural aspects in budgeting

The purpose of the budgetary control system is to assist management in planning and controlling the resources of their
organisation by providing appropriate control information. The information will only be valuable, however, if it is
interpreted correctly and used purposefully by managers and employees.

The correct use of the control information therefore depends not only on the content of the information itself but also
on the behaviour of its recipient. Goal congruence exists when managers working in the best interest also act in
harmony with the goal of the organisation as whole.

Behavioural problems
1. The managers who set the budgets are not who are responsible for achieving the budgeting targets.
2. The goal of the organisation may not coincide with the personal aspiration of individual managers. This is known
as dysfunctional behaviour.
3. When setting the budget, there may be budgetary slacks. Budget slack is a deliberate over estimation of the
expenditures and under estimation of the revenue.

Incremental Budgeting
An incremental budget start with the previous year budget results or actual results that add or subtract the inflation and
other know changes.

Advantages
- It is quick and easy method
- It is suitable for the stable organisations where costs are not significantly changes.
Disadvantages
- Build in previous inefficiencies
- Uneconomic activities may be continued
- Managers may spend unnecessarily to use up their budgeted expenditures allowance this year and same will be
allowed in the next year

Zero Based Budgeting

A method of budgeting that require each cost element to be specifically justified as though the activities to which the
budget relates were being undertaken for the first time. It is suitable for;
- It is useful for organisation where spend is discretionary
- Public sector organisations such as local authorities

Three stages of implementing the zero-based budgeting;

- Identify the decision packages
- Evaluate the decision packages
- Ranking and allocating the resources

Advantages
- Inefficient and obsolete operation can be identified and discontinued
- ZBB increase the involvement of the staffs
- It responds to changes in the business environment
- Knowledge and understanding of the cost behaviour pattern
- Resource can allocate efficiently and economically
Disadvantages
- It emphasis short term benefits to the detriment of the long term plan
- The budgeting process may be too rigid and may not be able to react to the unforeseen opportunity or threat
- Management skill may not be present
- Managers may feel demotivated due the large amount of the time spend on the budget
- Ranking may be difficult

Rolling budget
A budget (usually annual) kept continuously up to date by adding another accounting period when the earliest
accounting period has expired.

Advantages
- Planning and control will be based on a more accurate budget.
- Rolling budget may reduce the uncertainty in budgeting since they concentrate on the short term when the
degree of uncertainty is much smaller.
- There is always a budget that extends into the future.
- It forces management to reassess the budget regularly and to produce budgets which are made up to date.

Disadvantages
- Rolling budget are more costly and time consuming than incremental budget
- Managers may feel demotivated that they spend large amount of time for preparation of budget.
- An increase in budget work may lead to loss of control over work.
- There may be danger that last year budget plus minus a little bit.

Activity based budgeting