## **Learning Outcomes**

After studying this article, you will be able to explain and evaluate the behavioural factors affecting traditional budgetary control, recognize the limitations of rigid budgeting systems, and outline the core principles and benefits of the beyond budgeting model. You will also understand the practical and motivational implications of moving away from conventional budgeting approaches within the ACCA Performance Management syllabus.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you are required to understand not only the mechanics of budgeting systems, but also how they influence behaviour and decision making. In particular, you should be able to:

- Discuss behavioural implications of different budgetary styles (imposed vs participative).
- Identify common dysfunctional behaviours and motivational issues arising from traditional budgeting.
- Explain the inherent limitations of fixed, annual budgets in a rapidly changing environment.
- Explain and evaluate the beyond budgeting model, covering its main principles and the practical implications for management control.
- Assess pros and cons of adopting beyond budgeting practices within an organisation.

## **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 key feature of the beyond budgeting approach?
   a) Emphasis on tight top-down control through fixed targets
   b) Increased front-line empowerment and devolved decision making
   c) Use of ideal standards to motivate staff
   d) Rolling zero-based budgets only

2. True or false? Fixed annual budgets can sometimes encourage managers to focus on short-term targets, even if it means undermining long-term objectives.

3. What is a common behavioural problem associated with using strictly imposed budgets for performance evaluation?

4. State two benefits and two potential challenges when implementing beyond budgeting principles in a large organisation.

## **Introduction**

Budgeting is a central tool in management accounting, driving planning, resource allocation, control, and performance evaluation. However, how budgets are set and used has significant effects on employee motivation, behaviour, and ultimately, business performance. Budgetary approaches can shape managerial actions positively or lead to dysfunctional outcomes such as budget gaming or short-termism.

Traditional fixed annual budgets often struggle to keep pace with today’s rapidly changing business environment. As a response, the beyond budgeting (BB) model offers a flexible, people-centric approach that aims to overcome behavioural and operational limitations of traditional budgeting.

This article sets out the key behavioural considerations in budgeting, highlights typical issues associated with classic systems, and summarises the beyond budgeting concept and its implementation challenges.

## **Behavioural Aspects of Budgeting**

Budgeting does not just control money—it controls people. The process of setting, negotiating, and using budgets can have major effects on motivation, cooperation, and ethical behaviour.

### Management Styles and Budget Behaviour

The way budgets are set and enforced influences how employees react:

- **Budget-constrained approach:** Rigid adherence to budget targets. Can lead to short-term decisions, data manipulation, and stress.
- **Profit-conscious approach:** Emphasises long-term growth and overall business improvement. Reduces dysfunctional behaviour.
- **Non-accounting approach:** Focuses on non-financial goals and considers broader measures of success.

> **Key Term: dysfunctional behaviour**
> Actions by staff or management which aim to achieve budget targets at the expense of wider organisational objectives, often leading to negative or wasteful outcomes.

### Motivation, Goal Congruence, and Slack

Budgets can motivate or demotivate, depending on:

- **How achievable** the targets are
- **Level of participation** in setting targets
- **Use of budgets** for reward or punishment

When targets are set too high (ideal/aspirational standards), employees may give up. If targets are too easy, there is little incentive for improvement. Even with participative budgets, managers may create **budgetary slack**—deliberately underestimating abilities to make targets easier to achieve.

> **Key Term: budgetary slack**
> The deliberate underestimation of revenue or overestimation of costs by managers during budget setting, making targets easier to reach.

### Common Behavioural Problems

- **Short-termism:** Focusing on current period targets, potentially harming long-term objectives
- **Data manipulation:** Adjusting results or transactions to meet targets
- **Demotivation:** If managers feel targets are unfair or uncontrollable
- **Conflict:** Competition between departments, rather than cooperation

### **Worked Example 1.1**

A company rewards managers based solely on whether they achieve annual fixed sales targets. Manager A delays dispatching customer orders due at year-end until the new year, making current year sales match the target but harming customer relationships.

> **Answer:** Rigid use of annual fixed budgets for reward has led to dysfunctional behaviour—delaying sales to manipulate results, damaging both control information and customer trust.

## **Limitations of Traditional Annual Budgets**

Annual, fixed budgets have significant drawbacks, especially in today’s uncertain, volatile environment:

- **Lack of flexibility:** Cannot adjust promptly to market or internal changes
- **Inhibits innovation:** Encourages caution rather than creative solutions
- **Encourages ‘use it or lose it’ spending:** Managers spend up to their budget to avoid future cuts
- **Weakens strategic alignment:** Short-term variance minimisation may override longer-term business interests

### **Worked Example 1.2**

In year-end reviews, one department rushes to buy unneeded supplies to use up its remaining budget, avoiding a lower allocation next year. Is this goal congruent behaviour?

> **Answer:** No. Purchasing unnecessary supplies is wasteful and not in line with company interests. It is a direct result of the "use it or lose it" mentality encouraged by fixed annual budgets, not optimal resource management.

## **Beyond Budgeting: Modern Concepts**

The beyond budgeting movement proposes moving away from rigid annual budgets toward more adaptive and people-focused management processes.

> **Key Term: beyond budgeting**
> An approach to performance management that replaces fixed annual budgets with devolved targets, rolling forecasts, and relative (benchmark) measures, aiming to improve adaptability, learning, and employee empowerment.

### Principles of Beyond Budgeting

Beyond budgeting is built on six core management principles:

1. **Govern through clear values and boundaries, not detailed rules or budgets.**
2. **Set relative, external or benchmark-based performance goals, not fixed targets.**
3. **Give teams responsibility for setting their own targets and making decisions.**
4. **Monitor performance using continuous, real-time information rather than periodic budget reports.**
5. **Encourage team-based learning and accountability, not rigid compliance.**
6. **Allocate resources dynamically, as needed, not through annual fixed allocations.**

### How Beyond Budgeting Addresses Behavioural Issues

- **Motivation improves:** Staff set targets they believe are achievable, increasing buy-in.
- **Adaptability increases:** Rolling forecasts and flexible resource allocation allow rapid response to changes.
- **Goal congruence is strengthened:** Local decision-making within clear principles aligns better with wider company objectives.
- **Focus on long-term performance:** Relative benchmarking and continuous improvement become central.

### **Worked Example 1.3**

A software company abandons annual budgeting and instead lets its development teams set 3-month rolling goals based on competitor benchmarks and customer needs, adjusting resources monthly. Every team is evaluated against best-in-class results, not just last year’s performance. What effect would this likely have on behaviour?

> **Answer:** Teams are likely to feel more involved, motivated, and able to act quickly when customer or market needs change. Comparison with external benchmarks encourages continuous improvement. Managers cannot "game" the system through slack or artificial spending.
>
> **Key Term: rolling forecast**
> A financial plan that is updated regularly (e.g., monthly or quarterly), extending the planning horizon by the same increment each time.

## **Benefits and Challenges of Beyond Budgeting**

### Benefits

- Faster reaction to changing conditions.
- Increased innovation, learning, and engagement.
- More customer and market-oriented decision making.
- Better cost discipline through dynamic resource allocation.

### Challenges

- Requires a culture of trust and transparency.
- Not all staff or managers are comfortable with less central control.
- Major process and mindset change—can be resisted.
- Measuring relative or "external" targets can be complex.
- Can be difficult to implement in highly regulated or public sector environments.

### **Exam Warning**

> Do not assume beyond budgeting means removing all targets or abandoning financial discipline. The approach replaces annual fixed budgets with rolling forecasts, relative benchmarks, and devolved responsibility—not management "by chaos" or no targets at all.

## **Summary**

Behavioural aspects of budgeting are critical to effective management control. Traditional fixed budgets can demotivate, create conflict, and encourage undesirable behaviour. The beyond budgeting model addresses many of these behavioural challenges by removing the constraints of the annual budget and replacing them with flexible targets, devolved accountability, and continuous performance management. For ACCA PM, it is important to understand both the features of rigid budgeting and the practical implications (including benefits and problems) of moving beyond budgeting.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define key behavioural consequences of traditional budgeting for staff and managers.
- Identify limitations of fixed annual budget systems in dynamic environments.
- Explain the core principles of the beyond budgeting model.
- Recognise main benefits and challenges in adopting beyond budgeting.
- Relate these concepts to management control, motivation, and organisational adaptability.

## **Key Terms and Concepts**

- dysfunctional behaviour
- budgetary slack
- beyond budgeting
- rolling forecast


Behavioural aspects of budgeting - Beyond budgeting concepts