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100830904
Academic Session 1
MN2014K
Dr John Ahwere-Bafo
Dr Leonardo Rinaldi
Mrs Ong Soo Geok
2
Bachelor of Science (Honors) in Management
with Marketing
Budgetary c o n t r o l i s p a r t o f o ve r a l l
o r g a n i z a t i o n c o n t r o l a n d i s concerned
primarily with the control of performance. The use of
budgetary control in performance management has
of late taken on greater importance especially as a
more integrative control mechanism for the
organization. Critically evaluate this claim,
supporting your discussion with both theoretical
arguments and practical examples.

Budgetary Control and Its Part In Overall Organizational Control

Budgetary control in its essence according to Veronica (2014) means

the monitoring of activity by comparing the results of the budgetary
management in order to detect the dysfunctions, favorable and
unfavorable deviations analysis and transmission of information for
management decisions. Budgetary control can take form in many
different ways due to the budgets used that managers deem best to
compare results with. Budgetary control has gained a number of
criticisms due to its limitations and negative consequences in
relation to employees and management. Despite this, budgetary
control is still widely used in many organizations in practically any
industry and in many countries. This is in view of the fact that
budgetary control influences the managerial behavior that is later
reflected in their performance (Otley & Pollanen, 2000).
Otley (2001) takes note of the assumption that budgetary control is
the main integrative method for most corporate businesses as an
overall company control viewpoint. This assumption also presumes
that a corporates plan corresponds financially by the budget and
that the budget is used for monitoring and controlling the
complicated aspects of the plan. This is linked to the overall
performance targets of the organization.
Budgetary Control: Past and Present
According to Webber and Wildavsky (1986) in the western world
when even before the advent of money, governments had already
collected tax and used the resulting funds to support armies and
civil administration. It further developed in the 19th century; the
French had adopted the English word budget by then and made
tremendous results and achievements in providing technical
procedures and systems.
Budgetary control in a more relatable era such as the 20th and 21st
century shows to be much in use as many businesses use budgeting
in various ways. There are copious amounts of ways that companies
are able to use budgeting today; they are able to use various
different types of budgeting and customize it to the organizations
needs.

Uses for Performance Management and Criticisms Of Budgetary Control

The implementation of the budgetary system in product innovation
and marketing determines the products impact on the
organizational performance (Dunk, 2011). Budgetary control relates
and focuses itself on the performance of management or control. In
terms of performance, managers are able to identify problem areas
with sectors and analyze on performance. Budgets are used as a set
of communication by upper level management to lower level
managers and employees. The variances between actual results and
budgets are the way to calculate rewards for better performance
and to help management on making decision. A suggestion by
Marina Guzik (2011) to chief financial officers is the planning
purpose on budgeting can be fulfilled with an aggregate annual
budget and control can be exercised by means of a detailed monthly
budget. In a more extensive point of view, aggregate annual budget
has to translate the companys business plan for the upcoming year
expressed in financial expectations and the costs required for
profitability. A detailed monthly budget must sensibly break the
categories down into more comprehensive details and set goals for
each target.
In terms of budgeting overall, dissatisfaction does occur and
according to Hansen et Al (2003) happens on two presumptions:
corporations who wish to abolish budgeting altogether and
corporations who aspire to improve their current system. The reason
being that budgetary control systems are both able to motivate yet
demotivate workers. It achieves motivation due to links to rewards
should the targets be met. Yet this also takes a look at the budget
aspect itself, as it is able to demotivate managers entirely. This is
perhaps the most discouraging aspect in budgetary control is the
fact that it can greatly demotivate managers through slack. In a
budgeting context, slack is built by setting budget targets so that

they become easier to achieve (Lukka, 1988). This can be

ultimately caused by - as put by Stede (2000) the implication that a
managers salary, resources and career prospect is highly
dependent on a managers ability to meet the budget.
In this situation it results in managers negotiating for lower budgets
and each division demanding their own budget, which are set
according to their own standards. This process alone is demanding
and consequentially, for some companies who are unable to create
a working budgetary control as part of an integrative control
mechanism, it leads to costs exceeding benefits in which resources
spent to create such process does not amount to the output of
employees. However another factor that leads to this is that
budgets due to their fixed nature inhibit firms from adapting to
changes in a timely manner (Hansen et Al, 2003).
Hope and Fraser (2003a) additionally argues that budgeting is
antagonistic to the requirements of becoming adaptable and flexible
due to the modern competitive that is characterized by
unpredictability. This rings true to todays market as consumer
tastes, preferences and needs are constantly changing and the
immense competition along constant launches of innovation calls for
fast thinking and decisive action set by company management
thus far, when using a budgetary control system in which many
define as rigid it can be said that it has a relationship with
dysfunctional behavior such as bias as put by Van Der Stede (2000).
Budgetary Control in Firms and Countries
Looking at the negative implications on a budgetary control system,
it is wondered as to why it is used worldwide and exists in larger or
smaller parts in companies in any industry or capital markets.
Looking at a study conducted by Libby and Lindsay (2009), in which
companies in Canada and the United States were surveyed on
budgetary control a total of 440 out of 558 companies clarified
they did use budgetary control and a percentage of 94% do not plan
to abandon the use of budgets for control. An example of a

multinational company who extensively relies on budgetary control

is Johnson and Johnson, in a case study by Simons (1987) it is
shown how J&J uses budgets as the very heart of their system. They
are able to attribute their success to budgetary controls with a
budget system that is managed by a decentralized management
structure that emphasizes on an information sharing culture in
which the budget system is managed interactively and diagonally.
J&J uses financial estimates to create a fixed plan - which are
approved by directors and the current CEO, it is then budgets are
prepared for each division. Budgets are usually reviewed in March,
June and November. However looking at the objectives in Johnson
and Johnson, it remains purely financial in a sense that during the
case study J&Js main objectives were to recover its financial losses
during the year, look for savings, work on inventory carrying cost,
and reduce non critical headcount to save. This shows immensely
how J&J relies on budgets and budgeting for their systems of control
and would not seem to be able to abandon budgeting.
Then again, in contrast, in a study carried on by Hope and Fraser
(2003b), there are cases of how European counterparts were able to
replace budgeting control completely and still remained successful
growth in the industry. In a survey of Finnish firms by Ekholm and
Wallin (2000), it can be found that 25% are retaining their budgeting
system, 61% are upgrading and 14% are considering abandoning or
have already decided to abandon budgeting systems.
Examples of companies are Rhodia, a French manufacturer, Borealis
a petrochemical firm, and Svenska Handelsbanken a Swiss bank.
Svenskas case proves to be intriguing as, although not large in
international standards they have 520 branches spread across major
Nordic cities and other parts of the world. In 1960, Svenska was
doing relatively poorly whilst aiming to be the biggest bank in
Sweden this aim led to high costs, and internal disorders that
focused greatly on financial aspects proved to not be working for the
bank. In 1970, there was a change in management Dr. Jan
Wallander became the new CEO. Wallander was taught and
interpreted that budgets would prove either right and wrong which
proves hazardous, this resulted in his idea to scrap the idea of

budgeting and proceeded to improvise the whole Svenska system

into controls that do not rely on budgeting.

Graphic Interpretation of Svenska Handelsbanken Adaptive Process

Perhaps the most interesting aspect is that Svenska has been

operating without budgets for over 30 years. Wallander prepares an
informal work program that sets a direction and is discussed with
regional managers. It acts as a guide and is subject to constant
revisions depending on threats and opportunities in the upcoming
year. Employees are involved in the preparation and have their own
informal plan that is reviewed every six weeks. This plan and system
is the reason why Svenska remains as a benchmark for companies
who aim to abandon budgetary control systems.
Budgetary Control in Governments and Capital Markets
Government organizations are always prepared budgets in order to
fulfill campaigns, and are also frequently audited in order to avoid
misuse of funds. Public welfare uses a large portion of government
expenditure and it is a section that is vulnerable to conflict of
interest and corruption. Budgets alongside internal audits are
effective in enhancing transparency to limit corruption and ensure
the value of the budget at hand. In government sectors, there is no
way and no government who has or will abandon budgeting this is
form of way to control the public financial management system in
order to allocate resources to public needs.

Now in relation to capital markets or financial markets in which

includes the trading and selling of stocks and bonds - corporations
prove to be extremely impacted by capital markets due to the
volatility and unpredictability of todays capital markets. This is
caused by the rise of technology resulting in intensified competition
and extreme likeliness of imitability amongst products. Ryan (2007)
iterates that this changing pattern of shareholder loyalty along with
the intensity of competition and lowering profit margins has led to
growing pressure on an organizations in their attempts to achieve
planned operating results. In Ryans study of the capital markets in
relation to budgeting, he notes a company, Eurel, who previously
had short-term views of the company in terms of budgeting and
under-performed in comparison with their US counterparts. In order
to adapt to the current fast paced, unforeseeable capital markets
who affect their stakeholders greatly they had decided to
implement the control system called Continuous Improvement Plan
which resulted in Eurel give quarterly briefings to the analyst
community on their expected results. In theory, this budgeting
system was far more flexible as it could be completed in a only a
number of weeks but realistically it made constant tinkering of the
budget create an atmosphere of distrust which individuals within the
company view the lack of credibility of the budget and drastically
minimized employee contribution. One of the many and most
compelling complaints on the implemented flexible budget would be
that of the logistics division which believed that shareholders were
valued ultimately more important than employees and the sales
division which asserts that the search for credibility almost
psychotic and led to conservatism in forecasting which in the end
there are no best guesses as punishment would be received if the
target was not met.
Conclusion
Otley (2006) states that budgetary control is now regarded as an
inadequate solution to the problems of organizational control and
integration. Otley, along with many argue against budgetary control
as a part of an integrative control mechanism and there are

companies who have replaced or abandoned it entirely. Based on

evidence as mentioned above, majority of companies do not even
consider abandon budgeting and rely heavily on budgetary controls
as part of an integrative mechanism -because it provides a way of
universal language to employees and helps to provide extensive
view to focus on profitability and share prices. However, it is seen
that companies who have abandoned budgetary control are still able
to enjoy success. Again, in Ryans case study in which theoretically
flexible budgets for budgetary control seem to work well for todays
volatile capital markets it has seen how realistically it can be
extremely problematic.
Therefore, in the end budgetary control is primarily concerned with
the control of performance however there is an increasing amount
of theories and companies who both suggest and will abandon
budgeting and particularly its rigid and restrictive characteristics
who in todays volatile capital market require much more than
financial measures.

Word count : 2279

References
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10.
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