The Changing Role of Budget and Organizational Structure


1.1 Budget

Budget is one of common things that used in daily life, but in accounting perspective, budget is one of managerial accounting tools to help managers to manage well companies through the way of accounting itself. Based on daily perspective, budget can be defined as number of expenses or gain that reserved by someone, through forecasting the possibility the amount of money. Through management accounting perspective, Drury (2008), define budget as detailed plans for coordinating and plan of action for various activities in the future. According to Rajasekaran (2010), budget is financial plans for the future actions, or it can be defined as future plans that expressed in monetary terms. Other than that, CIMA terminology (2005) defines budgeting as the process of create, implement and operate the budget until the end of the budget period.

Changing Role of Budget and Organizational Structure

As the changing of environment from industrial ages to information ages, the role of management accounting was changing either. This means that budget as one of management accounting tools is changing in return. Changing role of budget can be seen from the psychology perspective. Budget was used not only as planning and control tools for a company, but also as motivational effect for the workers, even from different organizational level (Parker D.L., 2002, Hoque, 2003, Birnberg J. G., Luft J., Shields M. D., 2007). This motivation might help workers and company to meet the goal congruence and the best performance of both workers and company. Some researchers also link the so called relationship with another role, which is information sharing between superior and subordinates. Another role of budget in sharing the information to the subordinates might increase the performance of individual worker (Chong V. and Kar M. C., 2002, Parker J. and Kyj L., 2006, Leach-Lopez M., Stammerjohan W. and McNair F. M., 2007, Heath R. and Brown J., 2007, Su J. T. and Lin W.L, 2007) , since they have enough information related to the job itself.

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Besides, not only role of budget, but also the formation of organizational structure, that changed due to environmental changes. Parker D. L. (2002) stated that most of companies are moving to more flexible form of organizational structure. Decision-making and budgeting process within companies are developing with decentralized and participatory management style. This means that workers at different level of organizational hierarchy can affect the decision in the company, although the power in participation might be differ for each level of hierarchy. This can be seen from the research of Majovski I.P. (2007), about the management style in northern Europe. The result proven that most of companies in the region are implementing the flexible and decentralized management style.

Budget Process Approach

The changes in management style might affect the level of participation of the budgeting process approach in return. According to Drury (2008), in setting up budget there are three (3) approach of participation level, there are top-down budget, bottom-up budget, and blended approach.

Top-down budget is the budget setting that has no or less influence participatory by the subordinates or budgetees. Imposed budget is usually used to replace the name of top-down budget. Besides, the low level managements also have low power in the participation and involved in the calculations of budget for the top management. Top-down budget has one main advantage, which top management can always ensure the goal congruence and strategy alignment with the operation. Other than that, top-down budget can reduce the complexity and time-consuming of budgeting process. On contrary, it has disadvantages to the budgetee, for example, if the budget level is too high and impossible to achieve, the workers can be de-motivated and create adverse performance. Disadvantages might also affect the organization as a whole, for example if the budget level is too easy to attain, the worker can treat the budget as a box-ticking.

Bottom-up budget is the budget setting process that allows full participation from operational level. Participatory budget is used for replacing the name of bottom-up budget. Usually, top management give a general budget guideline for the lower manager and subordinates, then the flows of budget setting development will be started from the lowest level. Information will be gathered and grouped along the way to the higher-level manager until approved by both of top management and budget committee. Bottom-up budget may incur highly complexity and time-consuming for the overall budget setting process. Thus, it might ensure the commitment of all level of company's worker.

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The last approach is the blended approach, which is combination of both imposed budget and participatory budget. This blended approach usually called as negotiated budget. This approach starts with the setting up the financial performance objective by the top management and it will be distributed down to lower-level workers. Then, operating managers might collect data and create the budget based on the objective as well as the lower-level workers. After the budget created, it will be reviewed by top management to decide whether the budget is appropriate and approved. This approach might be repetitive, if the budget disapproved by top management until the final acceptance of budget is reached. Negotiated budget might give the budgetee to work cooperatively and within the goal congruence of the company. Slack in budget also can be reduced, due to the appropriate level of the budget. This approach requires highly technology environment companies in setting up the budget.

Problem Statement

Traditional budgeting is a common practice in the corporate world

Researchers are arguing about the appropriateness of budget in the current environment in information ages. Hope & Fraser (2003) argue the usefulness of budget in the current environment situation. They suggest that budget should be abolished and supersedes by another type of managerial accounting tools, namely beyond budgeting. Thus, based on exploratory studies from several regions around the world, traditional management accounting tools are still adopted by majority of companies. The reasons of the usage of traditional tools like budgeting are due to the higher benefit, simplicity, switching cost, and so on (Pavlatos O. & Paggios I., 2009, Libby T., Lindsay M. R., 2009, Uyar A., Bilgin N., 2010). Due to the survey of those researchers, it means that budgeting is still implemented and adopted in the current environment nowadays, although the role of it could be changed.

Problem arises within the organization to in setting up the budget level to the lower manager until the operational level in the hierarchy. Researchers and theorist in management accounting are arguing each other about the participation in setting up budgets in affecting motivation of the workers as well as the sharing of information. Company's managements are also searching the best approach in the implementation of the budget to motivate and achieve the best performance of all workers and managers in every level of organization.

Most of research in participation in budget setting with performance done in developed countries

Based on one of literatures that have been reviewed, Leach-Lopez M., Stammerjohan W. and Kyoo S.L., (2007), conclude that there is positive relationship between budget participation on performance (Brownell P. and McIness M., 1986, Kren, 1992, Kennis I., 1979, Searfoss A. and Monczka R., 1973). Leach-Lopez et al. (2007) has done this research in different scope and samples. The first research scope on the Korean managers in US companies and the second research scope on the Mexican managers in US companies. In contrast, the former research only uses the job-relevant information, whereas the latter research uses both job-relevant information and job satisfaction as intervening variables. Even though there were so many researches about the relationship between those two, Brownell P. and McIness M., (1986) argue that there is no specific testing on this area, although most of the researches give the same relationship.

Inconsistency found in the intervening role of motivation between the relationship between budget participation on performance

Several researchers in the previous studies also found the positive relationship between budget participation on performance through motivation (Merchant K. 1981, Kennis I., 1979, Searfoss A. and Monczka R., 1973). Other than that, Brownell P. and McIness M., (1986) did not find any relationship between the budget participation with performance through motivation variable. Kren L. (1992) also supports this statement through her research. After Kren's study, there are several researchers (Parker J. and Kyj L. 2006, Wong B., Guo L. and Lui G. 2010, Eker M., 2006, Chong V. and Kar M. C., 2002), who try to focus on this relationship. The result from previous researches found an inconsistency of the motivation as intervening variable.

Result gap in the relationship of job-relevant information as intervening role between budget participation on performance

Inconsistencies also found in the role of information sharing through job-relevant information that found in several literatures. Some researchers based on their findings shows that the effect on job-relevant information in the relation between budget participation with performance is not too significant. Thus, some said it might give courage for the workers to perform well in the works. Study on this area, motivation and information sharing, might be required in order to see the validity of the previous studies.

Research Question

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Most of the researches have been done in the US, there is no significant research about this area in Asia region. In order to see the previous findings in this area, this research will scope in the Asian region, particularly South-East Asia region, although some factors are affecting in this studies, for example the difference in culture, lifestyle, communication, and so on. Therefore these are main two questions driven from this study:

Is there any relationship between participation of budget on performance within Asian workers?

Is there any relationship between budget participation with performance through motivation?

Is there any relationship between budget participation with performance through information sharing?

Do the result of past researches still valid for current environment?

Objective of Study

To know whether is there any relationship between budget participation with performance within Asian workers.

To determine relationship between budget participation on performance through motivation.

To determine relationship between budget participation on performance through information sharing.

To compare the result of current research with past researches.

Significance of Study

This study will give contribution to business practitioners, especially top management of company to set up whether to give power to lower-level workers in participation on budget setting. Therefore, appropriate level of participation and budget level can be met in the operation, so that company and workers could work in line with the goal congruence of the company to achieve better performance. Management will also know the specific relationship of motivation and information sharing as intervening variable in the significance with performance. Therefore, managers can choose whether to apply the budget participation in budget setting or not.

Other than that, this study also can bring contribution to academician on the area of behavioral accounting in practice. Through this research, academicians can see whether the theories on books and other literatures can be applied in Asia region, with other factors affecting the human resource itself.

Outline of Dissertation

This dissertation will be divided into five (5) main chapters: Introduction, Literature Review, Methodology, Findings & Analysis, lastly Conclusion and Recommendations.

Chapter One - Introduction

Introduction gives reader about overview of current issue in budgeting, the changing of environment that affect role of budgeting and organizational structure in the common business practice nowadays. Problems that developed under new role of budgeting are assessed through some literatures. Research questions and objectives of studies built in this chapter also. In the end, significance of studies will be given, to ensure that this study contributes for specific readers.

Chapter Two - Literature Review

In this chapter, literatures from previous researches will be assessed in order to give clear picture about the specific issue that happened. The issue about the behavioural budget, motivation, will be explained in detail, along with the relationship with other independent variables. Each of literature will be reviewed in detail from its methodology, data, analysis, result, and conclusions.

Chapter Three - Methodology

In this chapter, detailed method in developing this study will be explained in detail, from type of data, population, samples, instrument, measurement, hypothesis and the data analysis plan.

Chapter Four - Data Analysis, Results & Discussion

Data collected will be analyzed with the statistical package for social science (SPSS). The result from analysis will be discussed thoroughly.

Chapter Five - Conclusions & Recommendations

This last chapter will conclude all the findings and discussion between the results that gathered in data collection. Limitation of the study will be given, along with the recommendation for other researchers. Future research areas, which not covered in this study, will be given either.



This chapter will describe all the literature gathered under the budget participation, information sharing, motivation and performance, along with its relationship from the past researches. Number of research under this area, budget participation with performance has been done in the past time, during the 20th century (Merchant K. 1981, Kennis I., 1979, Searfoss A. and Monczka R., 1973, Brownell P. and McIness M., 1986 and Kren L. 1992). But still, so many researchers replicates those studies, but with different intervening variables, measurement as well as data analysis.

This literature review consists of three (2) sub-titles, namely: Budget Participation on Performance through and Budget Participation on Motivation and Performance through Information Sharing. In the last part of this chapter, conclusion and theoretical framework of this study will be provided.

Relationship between Budget Participation on Performance through Motivation

Number of literatures found in this area is from the past old studies and less number of researcher that focus in this area. Based on literature found, Searfoss D. and Monczka R. (1973) do this research to examine the relationship of budget participation with the motivation of the budgetee to courage the performance, along with other intervening variables, need for independence and authorianism. This study uses the primary data based on questionnaire that distributed to 365 samples with different levels of workers and managers. Result found that there is a positive relationship between budget participation on motivation. Positive relationship also found in the organizational position or level with the level of budget participation. But, there is no relationship between other two intervening variables from the findings of the research.

Kennis I. (1979) supports the previous research on this area, by holding the research about the budget participation, clarity, feedback, attitudes, and self-rated performance between 169 operational managers through questionnaire. Result found that participation in the budget setting could give the motivational effect to the workers to achieve better performance.

Merchant K. (1981) has done research to examine the difference in the budgeting system regarding to corporate size, diversity and decentralization to be related with motivation and attitude toward the budget. Sample size of 170 managers from the companies is gathered and responded the questionnaire. Result found that size of corporate give different result for each of relationship of the variables. But, generally positive relationship is found between the participation toward the attitude of the budget.

Eker M. (2006) established the extend study of budget participation on performance, with the intervening variable of organizational commitment. Convenience sampling is chosen to pick the samples of 150 companies between top 500 companies in Turkey. Companies were sent a questionnaire consist of three measurement of those variables. The data were analyzed by using correlation analysis, factor analysis, multiple regression analysis and t-test. Result found that, organizational commitment is a significant intervening variable between the relationships of budget participation with the managerial performance.

Chong V. and Kar M. C. (2002) conduct the study within the managers in Australian companies to examine the relationship between budget participation and performance, with budget commitment and job-relevant information as intervening variables. Samples of 84 managers were asked to fill up the questionnaire and data were collected. Result found that, budget participation can enhance the motivation in committing the budget. It also gives the informational effect to enhance the job-relevant information to support the performance in the end. It supports the past studies about the dual role of budget participation. The former is motivational effects and the latter is informational effect.

Wong B., Guo L. and Lui G. (2010) use the self-determination theory (SDT) as their basis of research. SDT suggest that participation needed in the budgeting process for the sake of motivation, morale, performance and job satisfaction. In this study, motivation divided into several types, intrinsic, extrinsic, autonomous and controlled motivation. Study has been done in Hongkong by sample size of 101 bank managers through voluntary seminar and questionnaire. Result found that through participation in budgeting performance in the job can be increased.

On contrary, Brown and McIness (1986), did not find the same thing like above. Through the empirical study within 224 middle-level managers in Australia, they did not find any strong relationship between these two variables.

Kren L. (1992) examined the relationship about those variables with other intervening variables in the research. By conducting interview 80 managers of 500 top companies in USA. She found that there was unobvious relationship between performances through motivation of budget. Thus, relationship between budget participation has positive relationship with performance itself.

Parker J. and Kyj L. (2006) develop the study of the relationship between the budget participation with performance, with the vertical information sharing model between supervisors with subordinates in the budgeting process. Other than information sharing, organizational commitment and role ambiguity were tested in this study as intervening variables. Data collection within sample size of 70 managers with subordinates has been done through questionnaire. The data were tested with the path analysis with a result of the significant relationship between the budgetary participation with performance, through intervening variable of information sharing. Other intervening variables were found not significant with the main variables.

Relationship between Budget Participation on Performance through Information Sharing

Chong V. and Kar M. C. (2002) in the same study like explained in the previous sub-chapter were concluding that the budget participation through information sharing of job-relevant information might help the subordinates to work well and achieve better performance.

Parker J. and Kyj L. (2006) in the studies like explained in the previous sub-chapter also examine the informational sharing effect of job-relevant information in the budget participation that could increase the performance of the worker that cannot be found in the other intervening variables.

Leach-Lopez M., Stammerjohan W. and McNair F. M. (2007) follows and expand Kren L. (1992) past studies on this area. They distinguish the effect of the budget participation with performance directly and indirectly. Other than that, other intervening variables, job relevant information and job satisfaction, also introduced here. The study conducted within 143 Mexican and American mid-managers in US companies. The analysis was using the past researchers model, like path model correlation, t-test, robustness test and p-value test. Findings show that, there is strong relationship between performances in budget participation. The difference that the authors research than the past researches is the causal mechanism that linking those two variables. The intervening variables, job-relevant information that affects the relationship between independent and dependent variables is changes with the level of bilingual ability of the Mexican managers. However, another intervening variable, job satisfaction did not give a significant relation with those variables.

Leach-Lopez M., Stammerjohan W. and Kyoo S. L. (2007) study is a replication of the studies of previous literature by Leach-Lopez M., Stammerjohan W. and McNair F. M. (2007) with the same variables and data analysis in the studies. The difference in this study is the samples, by using Korean managers in the US companies, respondents of 71 managers respond for the questionnaire. The findings show the same things as previous research, but causal mechanism in the intervening variables is different with the past samples. In this study, result shows that there is significant role of the job satisfaction as intervening variable between budget participation with performance between Korean managers.

Heath R. and Brown J. (2007) conducted an extended study from previous research Kren L. (1992) within 259 workers through questionnaire to examine the relationship between budget participation with personal performance. But, they manage to relate other variables, job-relevant information and self-efficacy, as intervening variable. Regression analysis, coefficient analysis as well as t-test have been done for the analysis of the data gathered. Result found that, all those variables are related each other with positive relationship within all levels of management in the organization.

Su J. T. and Lin W.L (2007) clears the gap of the inconsistency in several accounting literatures about the effect of performance in the budget participation with intervening variable, information asymmetry. This study was held in Taiwan, with a sample size of 168 employees, through questionnaire. Path analysis and correlation analysis used for analyzing the data of the respondents. Based on the findings, the past studies about the positive relationship between budget participation on performance were proven. Information asymmetry also establishes positive relationship as an intervening variable. If the variable is present, performance will increase and vice versa.

Adler R. W. and Reid J. (2008) study about the wider scope of the effect of not only the budget participation, but also leadership style on job performance and satisfaction. Through questionnaire, 40 middle-level manager in New-Zealand companies answer the question. Result after the data analysis of reliability testing and stepwise regression shows that there is relationship between all variables that tested. However, the leadership style shows no relationship as moderating variable with the job performance of the worker.


Majority of the past researches done by doing cross-sectional studies in this area, so causal relationship cannot be found in all of the studies. This is could be the criticisms that occur in the study. Low generalizability also being an limitation on the study. Since most of the studies about the relationship between participation in budget setting on performance have been done in USA and give the same result, study in the other region might be needed to research in other region. Other than that, information sharing and motivation as an intervening variable could be needed answer the inconsistencies in the past studies.

Theoretical Framework

Based on the past literatures, theoretical framework between the variables in the study can be developed as a diagram as follows:

Participation in budgeting process as independent variable will affect positively to performance as dependent variable. Motivation could work as intervening variable in this framework. From the past findings, motivation that related by participation in budget process can affect positively to the performance. But still, some researchers found different result in the study. Motivation in this study can be in form of budget commitment. Other than that, role of budget participation as information sharing could be in form of job-relevant information, just like the previous studies. A gap was found in this role of participation in budgeting, however most of researchers treat the job-relevant information as a positive related with the performance.