Behavioural aspects of budgeting - Performance targets and d...

Learning Outcomes

After reading this article, you will be able to describe how budgets and performance targets influence behaviour, explain the causes and consequences of dysfunctional behaviour in budgeting, distinguish between management styles, and apply these concepts to real-world ACCA Performance Management exam scenarios. You will develop the ability to evaluate budgetary systems critically from both a technical and behavioural standpoint.

ACCA Performance Management (PM) Syllabus

For ACCA Performance Management (PM), you are required to understand the behavioural effects of setting budgetary targets and the risks of dysfunctional behaviour. In your revision, focus on the following:

• How budgeting influences staff motivation and behaviour
• The impact of budget setting styles (e.g., imposed vs. participative) on performance
• Common sources and examples of dysfunctional behaviour linked to performance targets
• The link between management style, controllability, and goal congruence
• Examining situations where dysfunctional behaviour can arise and how it may be mitigated

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 an example of dysfunctional budgetary behaviour?
   1. Seeking cost efficiencies
   2. Building slack into budget estimates
   3. Regularly revising standards to stretch targets
   4. Communicating clearly with staff
2. Which management style is typically most likely to encourage data manipulation in order to achieve budget targets?
   1. Non-accounting style
   2. Profit-conscious style
   3. Budget-constrained style
   4. Delegative style

3. True or false? Participation in budget setting always leads to improved motivation and performance.

4. Briefly outline two potential drawbacks of using highly aspirational budget targets for performance appraisal.

Introduction

Budgeting provides a framework for planning and control, but it also directly affects how individuals and managers behave within an organisation. Targets can motivate improved performance, but, if mismanaged, may result in adverse or dysfunctional outcomes, such as data manipulation or decisions that harm the business in the long run. This article explains the main behavioural issues you must know for the exam, including performance targets, motivational impacts, and dysfunctional behaviours.

Key Term: dysfunctional behaviour
Actions by managers or employees that are intended to achieve budget targets or performance measures, but which have adverse effects on the organisation’s long-term interests.

BEHAVIOURAL ASPECTS OF BUDGETING

Budgetary control is not only a technical exercise—how budgets are constructed, communicated, and used for performance evaluation deeply influences behaviour at all levels of the organisation.

The Motivational Effects of Budgets

Budgets can act as motivators when they provide a clear target and link performance to rewards. The difficulty of the target is a key factor:

• If too easy, employees lack challenge and may not strive to improve, resulting in a lack of progress.
• If too difficult or perceived as unachievable, motivation collapses and goal pursuit may end entirely.
• A realistic yet challenging target (an attainable standard) is best for sustaining effort and engagement over time.

Motivation is further affected by the extent to which budget holders feel the targets are fair, achievable, and under their control.

Key Term: attainable standard
A target that requires efficient performance and effort, but can be met under realistic conditions.

Management Styles and Their Consequences

Different approaches to budget setting and use in performance evaluation encourage different behaviours:

Key Term: goal congruence
The alignment of individual or departmental aims with the overall objectives of the organisation.

Participative vs. Imposed Budgets

How a budget is set significantly influences motivation and behaviour:

• Imposed (top-down) budgets: Senior management sets targets unilaterally. This may be efficient but can reduce buy-in and demotivate if targets are seen as unfair.
• Participative (bottom-up) budgets: Managers at all levels are involved in target-setting. This generally improves commitment and effort, but carries risks:
  • Managers may build in "slack" (easy-to-achieve allowances) to protect themselves.
  • The process can be slower and more politically charged.

Advantages of Participation

• Higher acceptance and commitment to budget targets
• Improved information flow leading to more realistic forecasts

Disadvantages of Participation

• Risk of budgetary slack: underestimating revenues or overestimating costs intentionally
• Time-consuming process

Key Term: budgetary slack
The deliberate inclusion of extra allowances in budgets by managers to make targets easier to achieve.

Dysfunctional Behaviour and its Causes

When targets are poorly set or misused, managers may respond with dysfunctional behaviour—including:

• Manipulating results (e.g., delaying maintenance or investment to achieve a short-term cost target)
• Focusing excessively on the budgeted numbers at the expense of long-term interests (e.g., slashing training spending to "hit" the budget)
• Manipulating data to conceal adverse variances or exaggerate achievements
• Encouraging interdepartmental rivalry instead of cooperation

These effects are most likely when:

• Budgets are strictly enforced with severe sanctions for missing targets
• There is a lack of controllability (managers are held accountable for outcomes outside their influence)
• Targets are unreasonably hard or based on incorrect assumptions

Worked Example 1.1

Scenario: A production manager’s performance is assessed solely on whether total monthly costs are at or below the fixed budget. In order to achieve this, the manager delays an essential machine overhaul to the next month.

Answer:
Delaying preventative maintenance may help report a favourable variance this month but increases the risk of higher breakdown costs later. This is a classic example of dysfunctional behaviour, where the pursuit of a short-term target leads to poor long-term decisions.

Worked Example 1.2

Scenario: A department head participates in budget negotiations and submits estimates that intentionally inflate expected costs for a new project.

Answer:
Overstating costs is an example of budgetary slack—the manager increases the chance of achieving a favourable variance later and possibly a larger bonus, but this undermines accurate planning, reduces organisational efficiency, and distorts performance analysis.

Exam Warning

Never assume participative budgeting alone guarantees improved motivation and performance. While participation can help, risk of slack, gaming, or prolonged negotiation always exists. Examine the context in every exam scenario.

Revision Tip

When answering ACCA PM questions on behavioural aspects, always consider both the positive and negative effects of budgets on motivation, and illustrate with practical examples.

Summary

Behavioural responses to performance targets and budgeting systems are central to real-world performance management. Well-designed, attainable targets motivate improvement, but poorly managed budgeting processes can drive dysfunctional behaviour, ranging from data manipulation to goal incongruence. Recognising these risks and applying suitable controls—such as balanced targets, fair responsibility, and appropriate manager involvement—are key exam skills.

Key Point Checklist

This article has covered the following key knowledge points:

• The motivational effects of budgets depend on how attainable targets are and the style of budget setting used
• Different management styles (budget-constrained, profit-conscious, non-accounting) create different behaviours and risks
• Participation in budgeting can increase motivation but creates risk of slack and gaming
• Dysfunctional behaviour may arise when targets are unreasonable, accountability is unclear, or pressure is too severe
• Understanding and applying the concept of controllability is essential for fair performance appraisal

Key Terms and Concepts

• dysfunctional behaviour
• attainable standard
• goal congruence
• budgetary slack