Mdc Lecture 3

Management Decisions and Control 22421/0

Management Decisions and Control Lecture 3 Budgets and Human Behaviour 1

Lecture Objectives 1.

Introduction

3.

Behavioural accounting research

5.

Participation in budget target setting

7.

Personality and budget participation

9.

Participative budgeting & budgetary slack

11.

Budgets as motivational devices

13.

Supervisory evaluation style

15.

Leadership style

17.

Towards a contingency theory of management accounting

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Introduction Why study behavioural accounting? 

Function of management accounting systems: To provide financial and non-financial information to assist managers in planning and controlling activities in organisations

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Management control is the management structure and processes of ensuring that organisational goals are achieved

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Organisational goals can only be achieved through people and management controls are essentially concerned with the control of human behaviour

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Therefore, understanding how accounting affects organisational behaviour is essential for designing effective management accounting control systems 3

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Behavioural Accounting Research Origin of Human Relations:  The famous Hawthorne study in the late 40’s found that human factors could have a profound effect on organisational performance  This led to the establishment of the Human Relations school, which replaced the Scientific Management movement (see Lecture 1) Argyris (1952) was the first study in a stream of literature termed ‘Behavioural Accounting Research’ (BAR)  Argyris (1952) investigated ‘The Impact of Budgets on People’  Budgets were viewed negatively by factory supervisors: Budgets are used as a pressure device  Budgets included unrealistic goals that were almost impossible to meet 

It was hypothesised that workers form cohesive groups to counteract and combat budget pressures 4  Recommendation: Budget participation as a means of overcoming Management Decisions and Control 22421/0 

Traditional Psychological Model Traditional Psychological Model: B. F. Skinner Stimulus (Cause)

Response (Effect)

Argyris (1952) Budget Pressure

Job-Related Tension (JRT)

Dysfunctional Behaviour

Participation

Satisfaction

Performance?

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Participation in Budget Target Setting Does participation in budget target setting result in higher motivation and therefore higher performance?  This was a key motivation for the study by Hofstede (1967) 

Hofstede argued that participation in budget target setting would appear to be a necessary, but not sufficient, condition for high budget motivation



In order to motivate subordinates, superordinate managers must have the correct ‘game spirit’: Sufficient communication (cf. pseudo participation)  Correct target levels (budget difficulty or tightness)  Judicious performance appraisal (eg supervisory evaluation style – see Hopwood, 1972) and  Appropriate behaviour (eg leadership style and incentives and reward) 

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Personality and Budget Participation Brownell (1981) The personality variable of interest in this study was ‘locus of control’  Individuals with an external locus tend to perceived events as unrelated to their own behaviour  Individuals with an internal locus tend to perceive that they have control over events Locus of Control Internal

Level of Participation

External

High

High performance & fast learning

Low performance & slow learning

Low

Low performance & slow learning

High performance & fast learning 7

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Participative Budgeting & Budgetary Slack 

Studies have found evidence to suggest that rather than helping productivity, participative budgeting actually promotes inefficiency because of the tendency of managers to build slack into budget targets (ie bias their budget estimates by understating revenue and overstating expenses – See for example, Onsi, 1973)



Slack acts as a cushion that enables a subordinate (budgetee) to avoid the likely penalty of failing to meet a budget target. Reasons for creating budgetary slack include: Pressure of top management (eg Argyris, 1952)  Need to hedge against uncertainty  Makes it easier to beat the budget and earn a bonus 



However, the situation is more complex than this – Lowe & Shaw (1968) found bias and counter bias in budgetary setting processes The problem of budgetary slack leads firms to develop a truth-

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Budgets as Motivational Devices 

Budget motivation will depend on the budget difficulty or tightness as perceived by the subordinate

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Hofstede (1967) and Stedry and Kay (1966) found:     





Up to a certain degree of tightness, performance improved as the budget increased in difficulty Beyond a certain level of difficulty, performance decreased Performance depends on an individual’s aspiration level Aspiration is the goal that one explicitly undertakes to reach where effort will be exerted just to meet the aspired-to goal If the budget is perceived as challenging and within the bound of reasonable possibility, individuals adjust their aspiration level to the new budget level and performance will improve If the individual sees the budget as impossible to achieve, they will become de-motivated.

Conflict occurs between the use of the budget for decision making, which requires accurate information, versus the use of the budget 9 for motivational purposes, which reflects some aspired-to

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Budget Models Hofstede (1967) and Stedry & Kay (1966)

Aspiration Level

Motivation

Performance

Onsi (1973)

Participation

Budgetary Slack

Decreased Performance

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Supervisory Evaluation Style Hopwood (1972) hypothesised that job-related behaviour depends more on the style in which the budget is used rather than its technical design. Three supervisory styles were proposed: Budget constraint supervisory evaluation style

4. 



High RAPM (reliance on accounting performance measure); managers use budgets in an inflexible manner – give subordinates negative feedback for budget overrun regardless of mitigating circumstances Resulted in negative behavioural consequences (eg job-related tension, manipulation of accounting reports, avoidance of innovation, adoption of short-term expedients at the expense of higher long-run costs

Profit conscious supervisory evaluation style

5.  

Medium RAPM; budget information is used in a careful and flexible manner Has none of the negative consequences associated with budget constraint style and it motivates managers to be concerned with controlling costs

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Leadership Style Ohio State Leadership dimensions: 

Initiating Structure (IS) – clearly delineating roles, clear channels of communication, well-defined patterns of organisation, detailed job instructions and a definite concern for the task

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Consideration – rapport, trust, communication and respect of the ideas and feelings of others

Budget constraint style – High on IS, Low on C Profit conscious style – High on IS, High on C Non-accounting style – Low on IS, High on C

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Towards a Contingency Theory 

Otley (1978) study did not support the findings in Hopwood (1972): ‘These results point toward the need to develop a more contingent theory of budgetary control based on differences in organisational types, the environmental circumstances in which they operate, and the norms and values current both within the organisation itself and within the society in which it is set’ (p146)



This finding led to the theorising of the contingent view of accounting (see Otley, 1980) 



The diagram in last week’s lecture was essentially the contingency view of management control systems. ie the design of control systems at the macro level will be dependent upon the strategy and external environment of the firm.

See also Hirst (1981) 13

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Budgeting: Contingency Approach Framework of Management Control Systems

External Environment

Strategy Corporate Competitive

MCS Budgets

Outcomes Financial Performance

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