## **Learning Outcomes**

After studying this article, you will be able to explain how behavioural factors affect the budgeting process in organisations. You will be able to define and discuss budgetary slack, explain how budgeting systems influence motivation and goal congruence, and recognise potential dysfunctional behaviours arising from poorly designed budget targets. You will also understand practical approaches for promoting positive behavioural outcomes within budgetary control systems.

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

For ACCA Performance Management (PM), you are required to understand how behavioural aspects can influence the effectiveness of budgeting as a control tool. This article covers the following syllabus points:

- The impact of budget setting on motivation and organisational behaviour
- The concept and causes of budgetary slack
- The problem of goal congruence and its relation to budgetary systems
- The effects of different participation levels in the budgeting process
- Strategies for promoting motivation, fairness, and alignment through 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. What is budgetary slack, and why might managers introduce it into budgets?
2. Which type of budget setting is most likely to increase goal congruence?
   a) Imposed (top-down) budgeting  
   b) Participative (bottom-up) budgeting  
   c) Rolling budgeting  
   d) Zero-based budgeting
3. True or false? Unrealistically difficult budget targets are likely to demotivate staff.
4. Briefly explain how budget incentives can influence the behaviour of managers.

## **Introduction**

Budgeting is a core management accounting tool for planning and control. However, its effectiveness depends not only on technical factors, but also on the behaviour of people involved in the process. Budgetary systems can motivate staff to perform well and align their actions with organisational objectives—but they can also lead to dysfunctional behaviours, such as the creation of budgetary slack, manipulation of information, or lack of cooperation if targets are seen as unfair.

Understanding how and why managers and employees behave in certain ways during budgeting is essential for constructing a budgeting system that is both effective and fair.

> **Key Term: budgetary slack**
> The deliberate underestimation of revenues or overestimation of costs in a budget, creating an easier target for the budget holder to achieve.
>
> **Key Term: goal congruence**
> The alignment between individual or departmental objectives and the overall objectives of the organisation.
>
> **Key Term: motivation (in budgeting)**
> The willingness of managers and employees to work towards organisational goals, influenced by their view of targets and incentives within the budgeting system.

## **BEHAVIOURAL CHALLENGES IN BUDGETING**

### Budgetary Slack: Why Does It Happen?

Budgetary slack occurs when managers intentionally set targets that are easier to achieve than should be the case. This behaviour may emerge in both participative and imposed budgeting systems but is most common when budget holders have influence over setting their own budgets.

The main reasons for budgetary slack are:

- To protect themselves against future uncertainty and avoid negative consequences if targets are missed
- To increase the likelihood of receiving performance-related rewards or bonuses
- To create flexibility or resources that can be used elsewhere
- As a defensive reaction to past criticism for adverse variances

The result is that overall company performance may be weakened, and resources allocated inefficiently.

### Impact on Performance

While slack can shield managers from risk, it reduces the usefulness of the budget as a performance management tool. Excess slack can:

- Lower the level of challenge and lead to inefficiencies
- Undermine the accuracy of forecasts and hinder planning
- Make interdepartmental comparisons less meaningful

### Goal Congruence: Aligning Objectives

Goal congruence means that what is best for an individual manager is also best for the organisation. Problems often arise when the budgeting system unintentionally encourages actions which conflict with the wider objectives (e.g., meeting one’s own budget at the expense of company profitability).

Factors affecting goal congruence:

- Incentive schemes based solely on departmental results can encourage “gamesmanship,” data manipulation, or sub-optimisation of overall company profits
- Lack of transparency or fairness in budget target setting erodes trust
- Interdepartmental competition can reduce cooperation and information sharing

### Participation and Ownership

Allowing managers to participate in the budgeting process can increase their commitment and sense of ownership. However, this may also increase the risk of budgetary slack if not carefully controlled.

> **Key Term: participative budgeting**
> A process in which budget holders are actively involved in setting their own targets.

### Motivation: The Right Level of Challenge

Motivation depends on how achievable budget targets seem. Research shows:

- **Attainable but challenging** targets are most motivating—people strive harder for a goal that is demanding but realistic
- **Too easy** targets (often caused by slack) lead to apathy, boredom, and low performance
- **Unrealistically difficult (ideal)** targets demotivate, leading staff to ignore the budget, manipulate figures, or lose trust in the system

Reward systems linked to budget achievement also affect motivation. If the link between effort and reward is clear and perceived as fair, motivation tends to increase.

> **Key Term: attainable standard**
> A budget or standard set at a level representing efficient (but not perfect) operating conditions, typically providing a realistic but challenging target.

## **Managing Budget Behaviour: Approaches and Solutions**

### Minimising Slack

To reduce budgetary slack:

- Ensure budget submissions are subject to critical review and challenge from higher management
- Compare forecasts to prior periods, external benchmarks, or industry norms
- Avoid heavy reliance on personal judgement; use data-driven inputs where possible
- Link incentives to a mix of individual and company-wide performance

### Encouraging Goal Congruence

To encourage goal congruence:

- Use a mixture of financial and non-financial performance measures
- Align incentives with organisation-wide targets, not just departmental results
- Encourage cross-functional cooperation and information sharing

### Designing Motivational Budgets

Set budget targets at a level that stretches staff, but is believed to be attainable with reasonable effort. Involve managers in the target-setting process, but ensure that final figures are realistic and consistent with overall strategy.

Provide feedback on performance regularly and fairly. Ensure that favourable variances are recognised, and that explanations and corrective actions are sought for adverse variances.

### **Worked Example 1.1**

A company allows its department heads to submit their own budgets to senior management for approval. The production manager estimates materials costs higher than the expected rate, and enters a higher labour hour estimate than their most recent levels. Senior management, wanting to encourage participation, approves the budget with little challenge.

**Question:** What behavioural issue is likely to arise, and what are its possible consequences for company performance?

> **Answer:**
> The manager has created budgetary slack, making their targets easier to achieve. This could result in inefficient use of resources, inaccurate overall forecasts, and a reduced challenge for the department. Over time, it may also demotivate other departments and make interdepartmental comparisons less meaningful.

### **Worked Example 1.2**

The sales department’s bonus scheme is based on achieving their own revenue targets. Last year, they met their budget while the company overall missed its profit goal. Investigations show the sales team prioritised high-volume, low-margin deals to secure bonuses, while ignoring high-margin opportunities with longer lead times.

> **Answer:**
> This demonstrates a lack of goal congruence. The sales team’s actions benefited their own results but harmed the company’s profitability. The budgeting and incentive system misaligned individual and organisational objectives.

### **Exam Warning**

> Never assume that participative budgeting always increases motivation or performance. If slack is allowed to accumulate, overall company performance and fairness can suffer. Always consider management review and transparency.

### **Revision Tip**

> In your revision, practice critiquing both the benefits and potential risks of participative and imposed budgeting systems—exam questions often expect you to discuss both behavioural advantages and disadvantages.

## **Summary**

Behavioural factors can either improve or undermine the effectiveness of a budgeting system. Budgetary slack, motivation, and goal congruence are shaped by how budgets are set, who participates, and the incentives built into the system. Effective control requires balancing involvement, appropriate challenge, and rigorous review to ensure fair, motivating, and strategically aligned targets.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define budgetary slack and explain why it arises
- Describe goal congruence and its importance for effective budgets
- Explain how motivation is affected by budget target setting
- Analyse the benefits and risks of participative versus imposed budgeting
- Suggest practical steps to reduce slack and improve alignment in budgets

## **Key Terms and Concepts**

- budgetary slack
- goal congruence
- motivation (in budgeting)
- participative budgeting
- attainable standard

Behavioural aspects of budgeting - Budgetary slack, goal congruence, and motivation