## **Learning Outcomes**

After reading this article, you will be able to explain how budgetary control systems influence motivation, participation, and behaviour within organisations. You will distinguish between imposed and participative budgeting methods, evaluate how target difficulty and involvement impact motivation, identify causes and consequences of budget bias and slack, and discuss the design of effective incentive schemes. You will also recognise best practices for achieving goal congruence and positive performance in budgetary control.

## **ACCA Management Accounting (MA) Syllabus**

For ACCA Management Accounting (MA), you are required to understand both the technical and behavioural aspects of budgeting. This article covers:

- The importance of motivation in performance management
- Factors in a budgetary planning and control system that influence motivation
- The impact of targets on motivation and behaviour
- Managerial incentive schemes linked to budgets
- Advantages and disadvantages of a participative (bottom-up) approach to budgeting
- Differences between top-down (imposed) and bottom-up (participative) budgeting

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is a possible disadvantage of imposed (top-down) budgeting?
   a) Stronger commitment to targets  
   b) Faster budget preparation  
   c) Lower sense of ownership  
   d) Improved communication

2. True or false? Participative budgeting always prevents budgetary bias and slack.

3. Give one example each of a financial and a non-financial incentive that might be part of a budgetary control system.

4. What is the likely impact if budget targets are perceived as unreasonable or unattainable?

## **Introduction**

Budgetary control systems are not only tools for planning and monitoring financial performance—they also shape behaviours, motivation, and attitudes throughout an organisation. The process of preparing and implementing budgets, the level of participation allowed, and the way targets are set all profoundly affect how managers and staff approach their responsibilities.

Motivation and behaviour in budgetary control are driven by factors such as the degree of involvement in budget setting, how challenging targets are, the presence of incentives, and whether rewards are perceived as fair. Understanding these effects is critical for producing budgets that do more than allocate resources—they support commitment, continuous improvement, goal congruence, and effective performance management.

> **Key Term: budgetary control**
> The process of comparing actual results to budgeted targets to monitor and manage organisational performance.

## THE PURPOSE OF BUDGETARY CONTROL

Budgets serve as detailed financial plans, tools for coordination, and standards for control and performance evaluation. However, the effectiveness of a budget depends not just on its accuracy, but on how it is perceived and used by those responsible for achieving it.

Budget systems can support the following objectives:

- Planning: Setting action plans for a future period
- Control: Comparing actual outcomes to plans and investigating differences
- Communication: Sharing expectations and goals across the organisation
- Motivation: Stimulating high performance by providing clear targets and rewards
- Evaluation: Assessing managerial performance against agreed standards

The motivational effect of a budgetary control system depends on how targets are set, who is involved, and whether staff feel committed to the outcomes.

## PARTICIPATION: TOP-DOWN AND BOTTOM-UP BUDGETING

Participation in budgeting refers to the involvement of managers and staff at different levels in the budget-setting process. There are two main approaches.

### Top-Down (Imposed) Budgeting

In top-down budgeting, budgets are set by senior management and imposed on operational managers with little or no input from those responsible for implementation.

> **Key Term: imposed budget**
> A budget determined by higher management without significant participation or consultation from lower-level staff.

Top-down budgets may be necessary where operational staff lack experience, or where strategic priorities must drive the process rapidly. However, imposed budgets can reduce commitment, lower motivation, and risk missing relevant operational viewpoints.

### Bottom-Up (Participative) Budgeting

In bottom-up budgeting, managers at lower levels are actively involved in preparing their own budget targets, which are then reviewed and consolidated by senior management.

> **Key Term: participative budget**
> A budget prepared with significant input from operational managers or staff who will be responsible for meeting the targets.

Participative approaches encourage ownership of targets, greater understanding of operational realities, and open communication. While they can increase motivation and accuracy, they may also lengthen the process and introduce risk of bias.

> **Key Term: budgetary slack**
> The intentional overestimation of costs or underestimation of revenues by managers, making targets easier to achieve.

### **Worked Example 1.1**

**A production manager is given a sales-driven cost budget, prepared entirely by head office without local staff input. Actual costs significantly exceed the budget, and the manager expresses frustration at not being consulted. What issues are likely present, and what could improve future budgeting?**

> **Answer:** The imposed budget likely failed to account for local conditions and did not benefit from the production manager’s knowledge. The lack of participation reduced motivation and commitment. Involving managers in future budget cycles would improve accuracy and engagement.

## MOTIVATION AND BEHAVIOUR IN BUDGETARY CONTROL

### The Role of Motivation

Motivation is the willingness of staff to strive towards organisational objectives. Well-designed budgetary control systems use budgets as targets that energise and focus effort.

> **Key Term: motivation**
> The drive or willingness of individuals to achieve organisational goals, influenced by participation, ownership, and perceived fairness.

Motivation is positively affected when:

- Managers believe the targets are achievable, fair, and within their control.
- Participation in the process increases commitment and perceived relevance.
- Progress is rewarded appropriately.

Motivation declines if:

- Targets are unrealistic, arbitrary, or seen as unattainable.
- Performance measures are used primarily for criticism or punishment.
- There is little autonomy or chance to influence the outcome.

### Budget Target Difficulty

The optimal difficulty level for budget targets is challenging but achievable. Targets that are too easy fail to encourage improvement, while targets that are too hard lead to frustration and disengagement.

- **Easy targets:** Risk complacency; performance may plateau.
- **Unrealistic targets:** Demotivate staff, reduce effort, and may encourage manipulation.
- **Challenging but attainable:** Encourage effort, learning, and satisfaction.

> **Key Term: goal congruence**
> Alignment between the organisation's objectives and the personal goals of employees or managers.

Budgets should aim for goal congruence—ensuring personal ambitions and rewards are in line with what is best for the organisation.

### Bias and Budgetary Slack

While participation promotes engagement, it can create the problem of budgetary slack—managers deliberately making budgets easier to achieve. Budgetary slack can lead to inefficient resource use and weaker organisational performance.

Senior management can minimise slack by:

- Reviewing draft budgets and challenging assumptions.
- Using historical data and benchmarks for comparison.
- Encouraging open discussion and critical feedback.

## INCENTIVES AND REWARDS

Successful budgetary control links achievement of targets to appropriate incentives.

> **Key Term: incentive scheme**
> A formal system of financial or non-financial rewards tied to achievement of specified performance or budgetary targets.

Incentives may include:

- Financial: bonuses, commissions, profit-sharing
- Non-financial: recognition, career opportunities, training

To be effective, the reward system must be:

- Clearly linked to measurable performance within the manager’s control
- Perceived as fair and attainable
- Transparent and understood by all staff

### **Worked Example 1.2**

**A company’s sales department is rewarded with a bonus for beating quarterly revenue budgets. For several years, the department easily exceeds target. What are the risks, and how can management improve the reward scheme?**

> **Answer:** Targets may have been set too low, or managers may have built in slack. Bonuses are paid without genuine improvement in performance. Management should review targets rigorously each year and base bonuses on both budget achievement and stretch targets to drive real improvement.

## FACTORS INFLUENCING MOTIVATION IN BUDGETARY CONTROL

Motivation is shaped by several factors, including:

- The level of participation permitted in budgeting
- Perceived fairness and realism of targets
- The degree to which staff believe they control their outcomes
- Quality and frequency of feedback on results
- The presence, value, and structure of reward systems
- How variances are investigated and used (for learning versus punishment)

Striking the right balance between top-down control and bottom-up engagement is essential for effective performance.

### **Exam Warning**

> **Exam Warning**
> Participative budgeting does not remove the risk of bias—be prepared to evaluate both benefits and limitations in exam scenarios.

## ADVANTAGES AND LIMITATIONS OF DIFFERENT APPROACHES

| **Approach**              | **Advantages**                         | **Limitations**                                           |
| ------------------------- | -------------------------------------- | --------------------------------------------------------- |
| Imposed (Top-down)        | Quick to prepare; aligns with strategy | Less ownership; may lack accuracy; demotivates            |
| Participative (Bottom-up) | Increases motivation, ownership        | Risk of slack; time-consuming; requires management review |

## **Summary**

The behavioural aspects of budgetary control—who participates, how targets are set, and what rewards exist—are as important as technical accuracy. Effective systems encourage participation that increases commitment, but also use oversight to prevent bias and slack. Challenging yet attainable targets, fair rewards, regular feedback, and good communication all support motivation and organisational success.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Distinction between imposed (top-down) and participative (bottom-up) budgeting
- How participation affects motivation and ownership
- The impact of target difficulty on behaviour and performance
- Risks and causes of budgetary slack and bias
- How incentive schemes influence performance in budgetary control
- Importance of goal congruence and setting fair, clear, and realistic budgets
- Factors affecting motivation, including involvement and feedback

## **Key Terms and Concepts**

- budgetary control
- imposed budget
- participative budget
- budgetary slack
- motivation
- goal congruence
- incentive scheme

Budgetary control and behaviour - Motivation, participation, and target setting