Behavioral Aspects of Budgeting

Based on Hopwood (1973), he had identified three styles of using the budget to evaluate management performance, which is Budget constrained style, Profit conscious style, and Non-accounting style.

Behavioral aspects of budgeting
Budget Constraint Style This budget style will try to ensure that the employee works hard and achieve the company budget within the short term. The budget is the only criterion to evaluate management performance. There is no justification that can use to evaluate a manager.  For example, manufacturing is running out of raw material during a peak production period due to some reasons which is not under company control. The procurement manager has placed a particular order at a slightly high price in order to have material on time with a fast shipping option.

However, he will consider as poor performance because he purchases material at a higher price than budget. This approach will lead to conflict between managers and teams due to the concept of a budget is always right. The team may feel that the decision is not making any scenes, while the top manager only follows the budget. Sometimes the manager tries to achieve the short term budget at the expense of company long term benefit. In a serious case, it will encourage the manager to manipulate the report to top management.

Profit conscious style This budget style allows the front line employees to make decision base on their judgment which is aim to increase company long term benefit. The management will provide guidance but not a strict rule or policy. It encourages flexibility rather than completely follow the budget. In the above example, the procurement manager will rewarded for his flexibility which help to get material on time so the company can meet customers order and prevent any production interruption. It will strengthen employee and management relationships. The manager will open a discussion with the employee rather than push them to follow a strict rule. As a result, the company will be able to make a good profit in the long term.
Non Accounting Style This budget style does not pay attention to the financial figure. It evaluates management performance base on other factors such as product quality, number of users, and customer satisfaction. The best example of this budget is tech companies such as Instagram, Uber, and Tesla. These companies had to make a loss for such a long time, but they are in a good position where the market share increase with high customer satisfaction. The share price keeps increasing as the shareholders expect the company to make a big profit in the future.