Analysing the behaviour of personnel in regards to budgeting

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This report deals with analyzing the behavior of all different types of personnel involved in the decision making process of a budget. At the beginning, this report will provide an introduction to basic budgetary definitions and processes. Then this report will discuss, in only an abstract form, the two major processes which are followed when making a budget. Short explanations and basic advantages of both processes will be provided. These processes are, namely, the top-down mandated and the bottom-up participative process.

Then this report will go into detail about three major aspects of human behavior when making the budget. These are, namely, bias, motivation and effective participation. All of these three aspects will be discussed in detail and their major application illustrated with their advantages and disadvantages. Three kinds of bias will be discussed, namely slack, upward bias and counter bias. There applications, and probable examples will be discussed. Then motivation will be discussed. A relatively recent theory regarding motivation is the expectancy theory. The expectancy theory and its practical uses will be discussed in detailed. Finally, the rewards in the expectancy theory will be discussed but only for a few lines, since most are self explanatory. Then this report will discuss effective participation and its advantages and disadvantages.

After that, this report will move onto how organizational structure affects the budget making process. Three major and interrelated factors will be discussed. Also, their practical applications will be illustrated. Then the attitude and viewpoint of the upper management will be discussed in relation to these issues. Also illustrated will be the fact that these factors form a major part of the budget making process and have the ability to influence it in either a positive way or a negative way.

Finally, in the last topic, the budgetary biasing framework developed by Lukka in 1988 will be illustrated and discussed in the abstract form. First off, the diagrammical view of the framework will be shown. But it is only used for illustrative purposes and as such, is only a simplistic condensing of the complete framework. Due to page limit constraints, this report will only discuss the framework in an abstract form. A broad outline will be provided to explain the framework.


This report will discus the behaviour of the people behind any company budget preparation process. At first, the report will describe the budgetary process and the two ways to go about it, following that this report will describe in details three major aspects of budgetary behaviour. These are, namely, the biases involved, motivation of employees and their effective participation in the budget. Later on it will discuss the Effect of Organizational Structure on the Budgeting Process using tree interrelated factors. Finally, the budgetary biasing framework will be illustrated.

The Budgetary Process:

Although there are many ways to go about the budgeting process, the two most common ones are the top-down mandated and the bottom-up participative processes.

Top-down Mandated Process:

The top-down process is a more authoritative way of producing a budget. In this process, the upper management of a company first decides the overall budget of a task or a period and then goes about dividing it into smaller level tasks. This goes on until all the tasks, higher and lower level ones, gets an allocated budget. One advantage here is to ensure that the budgetary allocated amounts are neither inflated nor deflated in any way. This is because all the estimations are done by experienced personnel who are familiar with their expenses. (Marce, 2009)

Bottom-Up Participative Process:

The bottom-up process is essentially the opposite of the top-down process. For this process, all the tasks and expenses required are first listed and their estimated amounts conjured. Then, after all expenses have been listed, their total is given to as the budgeted expense of the department for a period (Williamson, 1964). So the approach is from bottom level users to the upper management. Thus, in this approach, the major advantage is that, since all costs have been accounted for, it is easier for staff to stay within the budget and not overspend. However, the major disadvantage is that the budget may have been overstated. This may be because lower level employees may know that some amount of their budget will be cut due to austerity measures. (Marce, 2009)

Behavioral Aspects of budgeting:

In 1999, the Journal of Management Accounting Researched published a long running study documenting the behavior of employees during the Budgeting process. They identified three major premises, the Budgetary Biasing, Motivation (resulting in the Expectancy theory), and Effects of Participation.

Budgetary Biasing:

Budgetary bias is defined as "a deliberately created difference between the budgeting actors best legitimate forecast about the future and the submitted budget figure."(Lukka, 1998) An individual may act in this way because they are uncertain about the budgeting processes' final results and due to there being unavoidable cuts. There are 3 main components of budgetary bias: slack, upward bias and counter-bias.


Since budgets form an important part of employee evaluation, many employees attempt to overestimate budgetary expenses and underestimate revenue in order to make it easier for them to meet and exceed the budget in terms of revenue and keep under the budget in terms of expenses. (Walther, 2010) One main reason for this is to plan in advance for unforeseen events and so that these unforeseen events may be handled without exceeding budgetary expectations. A side effect of this is to lead to creation of an organizational culture where exceeding budgetary targets is the norm.

A direct result of slack is employee's failure to minimize costs and maximize gains. This may be due to an incentive to overspend and a lack of incentive to work hard enough to maximize revenues. (Walther, 2010)

Upward Bias:

Upward bias is where the middle managers of an organization deliberately overstate their ability to achieve goals. This may be due to a multitude of reasons, such as increasing confidence in the buying power of consumers, high expectations from employees, creation of incentive-based sales strategies, etc.(Walker, et al, 1999). However this may cause problems in the long run as employees, even though they excel in their positions, are unable to meet their budgetary targets. This may lead to friction between lower and middle level employees and upper management, if the upper management repeatedly sees bloated budgets which are not being met consistently. This has led to the growing use of counter-bias discussed below.

Counter Bias:

The increase in the adoption of upward bias by middle managers to increase their standing within the company led to increasing use of counter-bias by upper management. This is the bias that upper level management has towards the organizational budget due to repeatedly being shown inflated targets. Thus, this bias is basically an attempt by superiors to cut down on employee bias. Paradoxically, this also leading to an offsetting bias created by the upper management. (Walker, et al, 1999)

Motivation and the Expectancy theory:

The expectancy theory coined by Ronen and Livingstone in 1975 predicts an increase in employee motivation if employees regard the budgetary targets set by management as attainable and not unachievable wistful reports. The Expectancy theory states that if employees find their targets attainable in a reasonable amount of time and effort, they then will feel more motivation to pursue those goals and targets. This means that targets should always be set with a reasonable probability to achieve them. (Walker, et al, 1999)

The Expectancy theory also states that employees will be more motivated to achieve targets if it means that achieving these targets will mean an increase in the incentives provided by a company. (Ronen, et al, 1975) Simply stating, if employees have incentives to achieve budgetary expectations, they will be more inclined to do so. This may be due to the positive expectations of receiving desirable outcomes when achieving clearly defined goals.

The incentives are only limited by the creativity of companies' HR personnel. Some incentives may be intrinsic, such as higher self-esteem, feelings of accomplishment and self-congratulatory feelings. But a larger part of the motivation illustrates itself if the incentives are extrinsic, such as bonus, salary increases and promotions.

Effective Participation:

Effective participation is where subordinated actively participate in the budget making process. The positive outcomes of effective participation have been documented in research. The first advantage of effective participation is that employees are more likely to adhere to internal targets if they were involved in the making of these targets. Thus, participation will result in the convergence of employee and employer targets and goals (Walker, et al, 1999). Secondly, employee morale and satisfaction may increase in a participatory environment (Lindquist, 1995). Lastly, effective participation may lead to better communications between all levels of employees, helping to make better budgets. (Chow, et al, 1998)

However, there is also a dark side to effective participation. Research indicates that effective participation may be ineffective to increase performance in employees unless performance is measured in relation to the budget (Cherrington, et al, 1973). It may lead to the creation of slack (Antle, et al, 1985) and may lead some employees to exploit the budgetary process for slack. Thus, important communication is very important when introducing effective participation in a company. (Lowe, et al, 1968)

Effect of Organizational Structure on the Budgeting Process:

The organizational structure of a company is important in understanding the dynamics of the budgeting process and the susceptibility of bias. Bias can be introduced at any point in the budgeting process.

Three major and interrelated factors affect the production and bias of budgeting estimates. The first factor is the method used by a lower level employee in arriving at an estimation of the amount of any type of budgetary factor. Generally, employees use a combination of past experiences, estimated future variances and available information in preparing budgetary estimates. However, these estimates are controlled by organizational rules and ground factors (Lukka, 1988). The employee's estimates may also be affected by what they think their superior wants to see.

The second factor affecting the estimates made by an employee is regarding what will be communicated to their superiors. Budgetary bias, be it positive or negative, is generally in the direction which supports the superior's viewpoint (Berry, et al, 1975). On the other hand, the employee will be less biased if they know that they are expected to achieve their target, and whether the superior can independently verify the numbers given on a budget. In this case, the organizational structure can be observed both inhibiting and encouraging bias, depending on management skills, aptitudes and attitudes (Walker, et al, 1999). However, employees always base their bias on a small range of uncertainty. Thus, clear communication is crucial to weed out bias at the base or lower level of companies.

The third factor is that when superiors receive these estimates, they must consider the information at hand and their own estimates of the outcomes. The superior must then aggregate these budgets while keeping the upper managements expectations in mind. If the difference between the superior and subordinates estimates is too large, it should lead to further verification of these estimates. This may lead to two possible outcomes (Berry, et al, 1975). The first outcome is that an independent verification be made of these estimates, and it should clarify the most probable estimate to both superior and subordinate. Otherwise, either the superiors or subordinates estimate may be accepted. In both of these cases, future budgets will be less likely to contain bias as subordinates know that verifications are carried out for each estimate and at different levels of the organization. (Berry, et al, 1975)

As a result of the uncertainties when preparing a budget, upper management must take one of two views on what their expectations from a budget are. The budget can be viewed either as flexible, which would allow employees "breathing room" if unforecasted events occur which force them to deviate from the budgetary expectations. The other way is to view budgets only as a best estimate of what is likely to occur in the future, and not as any definite guide which has to be followed. Either way, taking a strict and inflexible view of the budget in unrealistic and impractical. (Merchant, et al, 1989)

The Budgetary Biasing Framework:

Lukka in 1988 proposed a framework based on organizational theory, behavioural research and accounting literature to produce a framework of budgetary biasing behaviour. A diagrammical view of the framework is displayed below.

Employees (both superiors and subordinates) actions are based on their intentions. Their intentions, in turn, are affected by their personal goals, the means available to achieve their goals, the availability of information and the presence of organizational, power and situational factors. Performance evaluation and rewards cannot be separated from the personal goals of employees.

The framework identifies three main intentions for using bias when making the budget. The first is the resource intention, which will give employees access to increased resources. The second is the performance evaluation intention. Since budgets are use to evaluate performances, an employee will naturally want to lower the standard against which they are evaluated. The third is the motivation intention, which depends on how motivated employees are to attain their targets.

Bias in budgets is also affected by organizational, situational and power factors within an organization. They are referred as determinants in the framework. These factors also affect the estimates taken by the employees and the ideal motivation behind different biases.


In conclusion, we can say that although bias is inevitable when making a budget, companies have to work towards reducing it. This report has identified the major aspects of human behaviour when making budgets. They are bias, motivation and effective participation. The report introduced bias, and described in detail three major types of bias, namely slack, upward bias and counter bias. Then the report discussed motivation and the expectancy theory. The expectancy theory, basically, states motivation strategies and discusses their major effectiveness and ineffectiveness when dealing with employees. Then this report illustrates effective participation, whereas employees are more likely to reduce their bias if they are involved heavily in the budget making process. The resulting bias can be eliminated through clear and concise communication on part of the management. Then the report discussed the effect of organizational structure on the budget making process. We discussed three major and interrelated factors through which the organizational structure influences the budget making process. Finally this report discussed the Budget biasing framework developed by Lukka and how it illustrates the dynamics and biases of the budget making process within an organization.

At the end of this report, we can say that although bias is an inevitable factor of human life and no matter what, it will affect all aspects of life; this can be countered effectively through coherent study of accounting literature and some application of psychology.