The Impact Of Budgetary Control On The Managerial Accounting Essay


A study was carried out to investigate the impact of budgetary control on the managerial performance of the Islamic Organizations in Malaysia. This chapter presents the background to the study, problem statement, research objectives and research questions, significance of study, limitation and organization of the dissertation.


Management accounting and financial accounting information differs in term of its users and uses. Management accounting information are used by managers and employees within the organization meanwhile financial accounting information being intended for use by shareholders, creditors and public regulators (Garrison & Noreen, 1999). In addition, management accounting information is confidential used by managers to plan and control business operations. This provides managers with basis to make informed business decisions and act as tool to help them perform their management and control functions.

Managerial accounting information includes information on costs of an organization's products and services. For example, managers can use product costs to guide the setting of selling prices. Moreover, these product costs are used for inventory valuation and income determination (Horngren & Foster, 2005) . Additionally, managerial accounting information are also obtained through preparation of budget and performance reports. The reports often consist of comparisons between actual and planned or current and past performance. This is managerial accounting function and the role are performed by management accountant.

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The Institute of Management Accountants (IMA) define managerial accounting as "management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization's strategy (Accountant, 2008).

Certified Management Accountants (ICMA) states "a management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking" (Accountants, 2006).

Business has become more competitive. To maintain competitive advantages, many organizations are motivated to increase their efficiency and effectiveness (Hung & Chen, 2010) through budgetary practices (Fruitticher, Stroud, Laster, & Yakhou, 2005). There are many definitions given by researchers on budgetary practices. Budget is a management instrument used by an entity, to ensure the dimension of the objectives, revenues, expenses and results at the management centres level. Then, the management evaluated the efficiency through comparing the results with the budgeted figures (Nicolae & Anca, 2010) and evaluated the effectiveness through the achievement of objectives (Staub & Hatziolos, 2004).

Budgets are used by different industries at different degrees and for various purposes. Some industries use budgeting as a tool for planning, medium of communication or performance measurement, and expenditure control mechanism (Fruitticher et al., 2005). Budgeting is a major management tool to facilitate management tasks and leading business towards achieving their goals (Hung & Chen, 2010). Management will use budget as an instrument for managing and controlling their operations, coordinating the allocation of resources, and performance evaluation (Fisher, Frederickson, & Peffer, 2002; Stede, 2000).

Budget can be recognised as summary of estimated expenditures for a given period. The amount of estimated expenditure can be adjusted based on previous years' performance. Budget can also be an outline for an organization's financial and operational goals. So, planning a budget will help an organization to allocate their resources, to evaluate their performance and formulate their plans (Ward, 2012).

A good budgeting process employs those who were capable to create the budget and align with the organization's objectives as well as responsible for adhere the budget (Foley, 2009). Usually finance committee and senior staffs will be participating in budget preparation. Timeline is established leaving adequate time for research, review, feedback, revisions before the budget is ready to be presented at board meeting (Foley, 2009).

A budget covers both financial and non financial aspects of planning. Cash flow, income, return on investment (ROI), return on equity (ROE) and return on assets (ROA) can be items for financial planning (Lee, Lin, & Shin, 2012). Outcome of product development, quality, delivery of services, customer satisfaction and absenteeism can be items for non financial planning (Abdel-Maksoud, Cerbioni, Ricceri, & Velayutham, 2010). Most organizations, budgets are prepared for short term, medium term and long term planning. According to Joshi and Abdulla (1996), budgets for short term planning usually cover a period of one year meanwhile long term planning cover for 3 years and more for planning and controlling purposes. Managers will compare actual results and budgeted figures. The deviations between actual results and budgeted figures are called variances (Horngren & Foster, 2005).

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Budgets are used as planning and controlling purposes for most organizations including the Islamic Organizations. In addition, Government of Malaysia used budget as their mechanism in evaluating performance. Modified Budgeting System was adopted by Malaysian public sector in order to encourage more participation from employees (Noor & Othman, 2012). Noor & Othman (2012) have focuses on decentralization to improve performance and participation by employees in making the decision. Since Islamic Organizations are part of government agencies, so, they do follow the guidelines provided by Government.

In Malaysia, there are two main Islamic Organizations; the State Islamic Religious Councils (SIRCs) and Islamic Religious Affairs Departments (IRADs). The objective of SIRCs is to help promoting the socio- economic of Muslims in Malaysia. Thus, it has to be managed efficiently and effectively as they are accountable to the stakeholders whom are Muslims public at large. There are total of 14 SIRCs, one for the federal territory and 13 for other states. Meanwhile, IRADs focuses on implementing and provide administrative leadership. Besides that, IRADs are responsible in providing programs, schemes or projects, issuance of guidelines and policies performing to religious affairs. Because of these responsibilities, IRADs needs to plan properly in their activities.

Problem Statement

The impact of budget participation and performance has a long history in the managerial accounting literature (Brownell, 1983; Cherrington & Owen Cherrington, 1974; Dunk, 1990; Mia, 1988) still subject to continuous debate (Chong, Eggleton, & Leong, 2005; Leach-Lopez, Stammerjohan, & Lee, 2009; Leung & Chan, 2001; Yahya, Ahmad, & Fatima, 2008). Participation and performance have positive relationship and it had been supported by both survey and experimental studies (Leach-Lopez et al., 2009). Noor and Othman (2012) claims that better understanding of the effects of budgetary participation allows the organizations improved their performance. So, the organizations should encourage their employees to participate in budgetary process.

The issue raise in this study is to examine the importance of budgetary practice in managerial performance for Islamic Organizations. Prior studies have discussed on the issue of the budgets in motivating the employees. For example, most of the organizations use budgets to motivate employees, allocate resources and evaluate performance (Walker & Johnson, 1999). The management used budgetary performance results to motivate the employees by giving bonuses, increase their salaries and promotions, meanwhile for bad budgetary performance; it gave bad impact to the employees including punishment or loses the job (Merchant & Manzoni, 1989; Stede, 2000).

Thomson (1967) challenged researchers to examine budgetary behaviour in public sector organizations (cited in Williams, Macintosh, and Moore, 1990). Budgetary behaviour may be different in public sector organizations compared to the behaviour in profit-making and less bureaucratic organizations. A study on budgetary participation and performance (BPP) conducted in Malaysian Ministry of Defence (MINDEF) by Yahya et al. in 2008 claim that Ministry of Defence is a large complex, mechanistic organization with a bureaucratic administrative structure. In the study, Yahya et al. (2008) revealed that budgetary participation may improve managerial performance when the management involved in budgetary process. The result consistent with the study that has been done by Noor and Othman (2012) which is take the challenge to study in Ministry of Home Affairs.

Most studies conducted on budgetary in Malaysia concentrates on various areas including the impact of the Modified Budgeting System (MBS) on performance measurement in government organizations (Karbhari & Mohamad, 2007), usefulness of budget (Ahmad, Sulaiman, & Alwi, 2003), and budget participation (Noor & Othman, 2012; Yahya et al., 2008). Meanwhile for Islamic Organizations, researchers usually focus on zakat in Malaysia concentrates on accounting and guidelines (Adnan & Bakar, 2009), efficiency and productivity (Norazlina Abd. Wahab & Rahman, 2012), efficiency and governance (Norazlina Abd Wahab & Rahman, 2011), problems and issues (Rahman, Alias, & Omar, 2012), perception of zakat recipients and amil (Wahid & Kader, 2010 ). However, the issue of the importance of budgetary control for managerial performance has not much been discussed and have been given little attention from researchers. Since budget is a mechanism for planning and control, Islamic Organization must use this management accounting tool extensively to ensure that they meet their objectives. In view of the fact, that budget usually used as management accounting tool in profit organizations, thus budget can provide similar impact for government agencies.

Furthermore, Islamic Organizations in Malaysia play significant roles in Muslim society and accountable to them. This study was done due to limitation of the scope, since it has little attention and Islamic Organizations are a part of government agencies. . This paper studied on the relationship between budgetary control and managerial performance in Islamic Organizations and also to measure the impact of budget on managerial performance.

Objectives of the Study

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The objective of this study is to investigate the relationship between budgetary control and managerial performance of Islamic Organizations. The purpose of having this study is to fulfil the following specific objectives:

To investigate the relationship between short term versus long term performance and managerial performance

To examine the relationship between budgetary slack and managerial performance

To analyze the relationship between influence of budget performance and managerial performance

To investigate the relationship between budget variances on managerial performance

To determine difference between corporate organization structures; generally centralized and generally decentralized and managerial performance

Research Questions

From the above discussion, the purpose of having this study is to fulfil the following research questions:

Does short term versus long term performance enhancing managerial performance?

Does budgetary slack enhancing managerial performance?

Does influence of budget performance enhancing managerial performance?

Do uses of budget variances enhancing managerial performance?

Is there any significant difference between corporate organization structures; generally centralized and generally decentralized and managerial performance?

Significance of Study

From the finding of the research, it can be concluded that the findings of the present study could provide good contributions to the staffs of Islamic Organizations in Malaysia. First, the staffs from the Islamic Organizations can use budget to evaluate their managerial performance. Second, we can elucidate the extent of budget understanding among staffs from Islamic Organizations, whether they able to use budget as a tool for planning and controlling. When the staffs understand the budget as a management tool, they will perform better in their works; in turn the Islamic Organizations can achieve their goals.

From an academic perspective, this study will provide empirical evidence regarding the budgetary control and managerial performance in Islamic Organizations. It is exciting to examine the impact of budgetary control on managerial performance of Islamic Organizations because less attention being given by researchers on Islamic Organization. This is an opportunity to conduct the research on budgetary practice in Islamic Organizations. The study will provide evidence on the relationship and importance of budgetary practice for the Islamic Organizations and promotes more research to be conducted in this context.

Limitation of the study

The scope of this study is restricted to managerial performance of Islamic Organizations in Malaysia which measured only budgetary practice. Other measurements on managerial performance should be included in this questionnaire. Hence, the figure analyzed would be more accurate. The analysis based on the states was unable to exhibit as the number of respondents is not fairly distributed.

In addition, the number of respondents was affecting the result of the study. In this study, the respondents were small number which is 37 respondents. It is because in one organization, there are only few staffs that involve in budgetary preparation.

Organization of the study

Overall, this paper is organized into five main chapters. It begins with an introduction in Chapter One that highlights an overview of Islamic Organizations and introduction of a budgetary practice. Besides that, the chapter also discusses on problem statement, objectives of the study, as well as the research question, the significance in pursuing this area of study and the limitation of the study.

The remainder of the current chapter is organized as follows: Chapter Two is the literature review that explains the relevance of this study with the past studies conducted on budgetary practice. Also, the chapter discussed on Modified Budgeting System which has been used by Malaysian public sector. This chapter also discusses the definition of Islamic Organizations and managerial performance. Research framework provides a thorough explanation used in this study. This followed by the development of the hypothesis.

Next, Chapter Three discussed in detail the research method comprises of sample, measurement of variables, reliability of items, the result and analysis of data that will be used in this study. Several statistical techniques such as correlation analysis, independent t-test and regression analysis were applied in analyzing the data.

Following this, Chapter Four presents the data analysis and findings. This chapter begins with the reliability of items. Next, it will present the analysis of data on demographic and personal characteristics of the respondents, followed by test of normality. Correlation analysis, independent t- test and regression analysis also will be discussed in this chapter. Discussion on the findings of the five objectives of the study and the result of hypothesis are discussed.

Finally, this will be followed by Chapter Five which concludes the study. This chapter summarizes the key findings in this study and provides implication of the research findings. Besides that, this chapter also provides the limitation faced by the current study and suggest future research on this topic area.


This chapter provided the background of the study which justified the important of examining the relationship between budgetary practice and managerial performance in Islamic Organizations, Malaysia. Then, it followed by statement of problems and the objectives of the study. Next, the contribution of the study to the literature will be discussed; and the organization of the thesis was presented in the final section of this chapter.