Examining the rapid development of budgetary control

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In the financial world, budgetary control have developed rapidly; from a static process to a more fluid and flexible total firm process, where it is used commonly as an integrative communication and control mechanism for an organisation.

Strategy, plans and budgets are interrelated and affect one another. Control presupposes the existence of effective planning, which means without planning, control is meaningless. Similarly, without control, budgets are improbable to be achieved. Budgeting is most useful when it is done as an integral part of an organisation's strategic analysis. In order to be successful, it is vital that business plans for the future. Many authors have suggested that the budget specifies both an objective function and decision alternatives, which means the participation in setting budgetary goals encourages mangers to identify with their goals, accept them more fully, and work toward their achievement (Argyris, 1952; Becker and Green, 1962; Wallace, 1966; Hanson, 1966; Dunbar, 1971). Furthermore, budgetary control turn managers' perspectives forward, which enables managers to be in a better position to exploit opportunities. This allows them to anticipate problems and take steps to eliminate or reduce their severity. By understanding cost behaviour, managers can also better predict how total budgeted costs are affected by different projected output levels. Similarly, by understanding cost tracing and cost allocation, managers are able to show how different projected revenue and cost amounts will impact upon the budgeted profit and loss statement and balanced sheet.

Emmanueal et al. (1990) suggested that budgets fulfil many different purposes for an organisation. Besides being an important element in decision making, budgets serve as a mean of authorizing actions, forecasting as well as planning, controlling, co-ordinating and motivation through money values and departments within an organisation. He also noted that different elements of controls are to be found in the different functions. In different organisations, budgets may be given in a different emphasis; a budget that is designed to serve one purpose will probably be less effective at serving other purpose. Chow et al. (1996) similarly suggested that different accounting controls may affect subordinates' behaviour differently. Organisations may need to implement other forms of accounting controls simultaneously to achieve the desired behaviour as 'Controls can serve as complements or substitutes for one another, and they also may differ in both magnitude and area of impact.'

Despite the almost universal use of budgetary control systems as a major form of integrative control within businesses and the other organizations, it has also become increasingly apparent that budgetary control engenders some major problems. These points are summarised by Neely et al. (2001) p.115, which suggest that budget are time-consuming to put together while only adding little value. They make people feel undervalued and at the same time encourage 'gaming' and perverse behaviour. They concentrate on cost reduction rather than value creation.

However the evidence suggests that although these techniques may have produced some benefits for those who have implemented them, they have not solved the underlying problems with budgeting. Neely et al. argue that this is because changing budgetary and planning procedures is a very major and costly activity, and traditional budgetary processes are difficult to discard because 'they remain a centrally coordinated activity (often the only one) within the business. It is usually the only process that covers all areas of organisational activity' (ibid., p.5-7).

A more radical approach has been put forward under the banner of 'beyond budgeting'. Jan Wallander, who has long rejected the use of budgetary control because of the unpredictability of events. He concludes: 'A budget will…either prove roughly right, and then it will be trite, or it will be disastrously wrong, in which case in which case it will be dangerous. My conclusion is thus: Scrap it!'


Budgeting is an important management technique leading to advantages of planning, co-ordination, control, and motivation. These advantages are only realised if the budgetary control system is operated with appropriate consideration for the employees whose work is planned and monitored by the system. After considering the negative aspect of budgeting, it suggests that budgets might unable to cope with a fast- changing environment and should be abandoned in favour of more flexible and more integrated methods of planning. However, it would be premature to totally abandon budget as a tool of planning and control. For most businesses, budgets still remain a key tool for planning purpose.

All of these positive aspects show that budgets potentially may be a very useful managerial tool. However, in some circumstances, for example, low moral and poor motivation as a consequence of an improperly applied budgetary control system may lead to resentment and conflict rather than co-operation. In this atmosphere, managers may react against one another, and they may seek to distort the budgetary control system in their favour by dysfunctional behaviour and negative attitudes among organisational members (Argyris, 1952; Wallace, 1966; Schiff and Lewin, 1970). Firstly,

There is also environmental turbulence to be taken into account. The greater the environmental turbulence, the less that traditional budgetary planning and control processes are used (Samuelson, 2000). Samuelson also quotes Wallander (1999): 'it is better to adapt instead of to plan'. This support the idea that adaptation based on planning ceases to be as effective as adaptation based on environmental scanning and agility. Similarly, Hirst (1981) also studied the effect of different environmental conditions. He found that there is a high degree of uncertainty as accounting measures are seen as providing a less complete description of performance than in a more stable environment. Govindarajan (1984) supports this statement, suggesting that in a highly uncertain environment more subjective evaluation procedures are likely to be adopted. Both of these studies suggest that the effect of strong reliance on budgetary measures of performance is contingent upon the strength of the link between managerial behaviour and desired results, which is often quite weak and is more ambiguous in an uncertain environment. Another point which Allen (1998) describes is the rapid changes in the business environment of today. The unexpected changes in the commercial environment make it very difficult for manager to plan and exercise control in the future, where this could happen when an unexpected collapse in demand for services of the type that the business provides. In this situation, the issue of performance and its measurement can be problematic given that nothing will be achieves by pretending that the targets can be met and these changes will make obsolete a rigid approach to budgetary control.