Behavioral Aspects of Budgeting in Managerial Accounting

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Businesswoman working on budget at desk.
Businesswoman working on budget at desk. (Image: View Stock/View Stock/Getty Images)

An official budget may look like a rational, objective document, but it's often anything but. Budgeting is a key part of managerial accounting, which focuses on using financial information for planning and decision-making. Unlike with financial accounting, managers have to consider human nature, not just numbers, when putting together a budget. For instance, the managers who draw up a budget may have personal priorities that skew the numbers. The employees who live with the budget may resent the limits it puts on them.

Getting Buy-In

The simplest, quickest way for management to draw up a budget is to do it top-down, without consulting the lower ranks. This is a popular approach in corporations with centralized decision-making, but it can cause problems. Workers and lower-level managers may think the budget sets an unrealistic standard and resent being told to live by it. When management solicits feedback and employee input, it takes longer. Employees who feel they've helped set the budget, however, are more likely to make it work.

Self-Interested Managers

Budgets aren't always objective, because management isn't objective. Whoever participates in drawing up the budget may have vested interests. For example, a department head has a stake in emphasizing her department's need for extra resources and a bigger share of the money. That can lead to him inflating estimates of the money the department needs or how much it contributes to the company. An effective budget-making process has to include enough objective analysis that it can get past the human factor.

Constraints and Resentment

Some employees feel a budget is a form of punishment. Managers can use budgets to deny even reasonable requests or penalize employees for spending too much. Workers may feel they can't do their jobs properly because of restrictions. Employees can become even more hostile if meeting the budget is a key standard in assessing performance. An article in "Accounting Historians Journal" says employees shackled to a bad budget are likely to pad estimates and fudge figures to get around it.

Making It Work

Getting employee input in drawing up the budget can help them commit to making it work. It also helps if managers present budgets as something they and their staff will tackle as a team, working together. Efforts to involve employees have to be sincere, though. A phony display of interest in the employees' view or a show of hearing their concerns won't cut it. Employees see through those tricks, and that makes them even more cynical about the management goals and decisions.

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