Budgeting thesis

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Titleof Dissertation
ASSESSMENTOFTHERELATIVEIMPORTANCEOFHAVINGTHEOLDTRADITIONAL
BUDGETINGTECHNIQUEASA PLANNINGANDMANAGEMENT CONTROLTOOL
AND ITSCRICITISMS.
Author
[FredM’mbololo
Supervisor
[ StefanoAttici]
Purpose of the thesis:
To contribute tothe budgeting theory ingeneral andmake recommendations
on how to improve on the oldtraditional budgeting technique.
Academic Year
[2013-2014]

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Acknowledgement
Thisthesisiswritten aspart of furtherresearchonbudgetingbut notforsubmittingforanyparticular
degree course. Thisresearchstudyprovidesme withdeeperunderstandingof how oldtraditional
budgetingactsas a planningand managementcontrol tool whilecriticallyassessingitscriticismsand
consideringthe alternativesmethodsof budgetingsuchasBeyondbudgetingandthe restas outlinedin
thisresearchstudy.
Firstof all,Ithank my HeavenlyFatherforthe Grace and Healthhe has grantedme
Secondly,Iappreciate Stefano Atticci forall hissupportand deepguidance duringthisresearchstudy.I
alsothank the facultymembersof LSBFfor theirendlesssupport.
Of course,itisneedlesstoshowmygratitude tomycolleagueshere inKenyawho participatedinthe
interviewsand helped me incollectingthe relevantdatathrough qualitativemethodapproach.
Finally,Ithankmyfamilyandfriendswhoprovidedme withapeace of mindandencouragedme to
complete this researchstudy.
FredM’mbololo
23, January,2014

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Abstract
Purpose – Traditional budgetsare seenbypractitionersasbeingincapableof meetingthe demands
of the competitiveenvironmentandare criticizedforimpedingefficientresource allocationand
encouragingdysfunctional behaviorsuchasmyopicdecisionmakingandbudgetgames.However,
budgetingisstill regardedasanorganizational imperative managementtool andthere islittle empirical
evidence thatorganizationsaltertheirexistingbudgetingpractices.Iintendtoassessthe relative
importance of havinga propertool forbudgetingversusthe abilityof whoever“owns”the budgeting
processto criticallyassessthe indicationsthatthe tool isgenerating.
Design/methodology/approach –A case studyA was chosenandthe use of budgetsas a management
control tool was assessedindetails,the budgetingprocesswasalsoreviewed,alternative methodsto
budgetingwere alsoconsidered.
Findings–The researchresultsconfirmthere isa contradiction of a highdegree of criticismon
traditional Budgetingasmanagementcontrol tool butveryfew organizationshave adoptedthe
alternative methodsof budgeting.Itseemsthatthere needs tobe acertainlevel of dissatisfaction
withinanorganizationintermsof dysfunctionalbehavior,gamingandgoal incongruency before itstarts
to examine itscurrent situationandsearchforalternatives.Assuch,itseemsthatsome momentumfor
change needstoexist before changesare considered,ratherthanthatorganizationsare continuously
lookingforthe best possible alternative totheirbudgetingprocess.A lackof a needforchange –
because the processis consideredsatisfactorilyefficient –is the mostimportantfactor why
organizationsare not consideringchangestotheirbudgetingprocess,followedbycognitiveand
preconsciousconstraints.
Originality/value –The papercontributestothe accountingliterature asitprovidesevidence onthe
factors thatcouldinfluence the acceptance of changes inthe budgetingprocess.Knowingthesefactors
will increase the chance thatmanagerscan successfullyintroduceandimplementanadjusted
budgetingprocessandhence criticallyevaluatebudgetingasanappropriate managementtool.
Keywords:Budgeting,Budgets, managementtool
Papertype Researchpaper

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Acronyms and Abbreviations
ABC ActivitybasedCosting
ABB Activitybasedbudgeting
ABM Activitybasedmanagement
BB Beyondbudgeting
BBRT Beyond budgetingroundtable
BSC Balance Score Card
CRM Customerrelationshipmanagement
EVA Economicvalue added
KPIs Keyperformance indicators
MCS Managementcontrol systems
RB Rollingbudgeting
RAPM Reliance onaccountingperformance measures
VBM Value basedmanagement
ZBB Zerobasedbudgeting

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Content of table
TITLE PAGE..................................................................................................................................................i
ACKNOWLEDGEMENTS............................................................................................................................ ii
ABSTRACT..................................................................................................................................................iii
ACRONYMS& ABBREVIATIONS................................................................................................................ iv
TABLE OF CONTENTS................................................................................................................................v
LIST OF TABLES..........................................................................................................................................xi
LIST OF FIGURES........................................................................................................................................xii
CHAPTER ONE: INTRODUCTIONTO THERESEARCH STUDY
1.0 Introduction............................................................................................................................1
1.1 ResearchBackground.................................................................................................2
1.2 Statementof the problem..........................................................................................3.
1.3 Purpose of the study...................................................................................................4.
1.4 Objectivesof the study...............................................................................................4
1.5 Research questions.....................................................................................................4
1.6 Significance of the study.............................................................................................5
1.7 Scope of the study......................................................................................................5
1.8 Assumptionsof the study...........................................................................................5
1.9 Limitationsof the study...............................................................................................6
1.10 Mitigatingfactorsto the study....................................................................................7

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1.11 Delimitationstothe study..................................................................................7
1.12 Definitionsof terms............................................................................................7
1.13 Structure of the study........................................................................................8
CHAPTER TWO: LITERATUREREVIEW ONBUDGETING
2.0 Introduction..........................................................................................11
2.1 Theory and Evolution of budgeting.............................................11.
2.1.1 The theory of budgeting...................................................11
2.1.2 Evolution of budgeting in France......................................12
2.1.3 Evolution of budgeting in Great Britain............................13.
2.1.4 Evolution of budgeting in United States............................13
2.1.5 Dramatic changes in budgeting.........................................15
2.1.6 Evolution of budgeting within the three waves of economic
change................................................................................16
2.2 Other descriptions of a budget and budgeting............................16
2.2.1 Uses of budgets..................................................................16
2.3 The process of budgeting.............................................................20
2.3.1 Budgeting process at Case study A......................................22
2.4 Classification of budgets...............................................................25
2.5 Problems with traditional budgeting in practice..........................26
2.5.1 Additional problems with traditional budgeting...............28
2.5.2 Other benefits of throwing out the budget process and its
associated annual performancetrap. ...............................32

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2.6 The role of budgetary data in performanceevaluation...............33
2.6.1 Budget constrained style....................................................33
2.6.2 A profit conscious style.......................................................33
2.6.3 A non-accounting style.......................................................33
2.7 Overview of activity-based budgeting...........................................36
2.7.1 The role of budgeting in planning and control....................36
2.7.2 Activity-based budgeting.....................................................37
2.7.3 The two main benefits of ABB.............................................38
2.7.4 Using ABM for operational improvements and strategic
Decisions...............................................................................40
2.7.5 A model of activity-based budgeting....................................44
2.8 Alternatives to traditional budgeting..............................................47
2.8.1 Rolling budget.......................................................................47
2.8.2 Activity-based budgeting...................................................... 48
2.8.3 ZBB beginnings.......................................................................50
2.8.3.1 What ZBB does...................................................51
2.8.3.2 ZBB basics...........................................................52
2.8.3.3 Identifications of organizational decision units..54
2.8.3.4 Construction of decision packages.....................54
2.8.3.5 Ranking of decision packages and allocation of
Resources.............................................................55
2.8.3.6 Applicability.........................................................59
2.8.3.7 What can we expect of ZBB.................................61
2.8.4 Beyond budgeting....................................................................62
2.8.4.1 The ‘beyond budgeting’ model-private sector....66

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2.8.4.2 The public sector..........................................68
2.9 Conclusion.........................................................................69
2.10 The beyond budgeting round table (BBRT).......................72
2.10.1 The beyond budgeting or coherent model...74
2.11 Balance Scorecard.............................................................78
2.12 Balance Scorecard as a management control tool............79
2.12.1 Strategy focused organization.......................81
2.12.2 Summary of literature review........................84
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction............................................................................................87
3.1 Criticism of prior research methods.............................................87
3.2 Research philosophy.....................................................................90
3.2.1 Quantitative research.........................................................90
3.2.2 Qualitative research............................................................91
3.3 Validity, reliability and generalization............................................92
3.3.1 Data quality issues associated with semi-structured and in-
depth interviews..................................................................91
3.3.2 Reliability..............................................................................93
3.3.3 Validity..................................................................................94
3.3.4 Generalizability.....................................................................95
3.4 Secondary data................................................................................96
3.5 Primary data....................................................................................97
3.6 Data analysis....................................................................................97
3.7 Ethical considerations in the research study...................................98

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CHAPTER FOUR: FINDINGS, ANALYSISAND DISCUSSIONS
4.0 Introduction.....................................................................................102
4.1 Strategic planning..................................................................103
4.1.1 Operational Integration...............................................103
4.1.2 Performancemeasures................................................103
4.1.3 Progress evaluation.....................................................104
4.1.4 Reporting.....................................................................104
4.1.5 Analysis and continuous improvements......................104
4.2 Top down approach budgeting practices...............................106
4.2.1 Advantages of top-down approach of budgeting........106
4.2.2 Disadvantages of top-down approach of budgeting...106
4.3 Budget performance................................................................107
4.3.1 Budget as a fixed contract.............................................109
4.3.2 Performanceevaluation................................................109
4.3.2.1 Time consuming........................................110
4.3.2.2 Planning and forecasting...........................110
4.4 Uncertain and competitive environment.................................111
4.4.1 Budgets are rarely strategically focused and often
contradictory..................................................................111
CHAPTER FIVE: CONCLUSIONS, RECOMMENDATIONS AND FURTHERRESEARCH
5.0 Introduction.........................................................................................112
5.1 Some criticisms of the current budgeting systemas a management
control tool................................................................................113

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5.2 Budgeting at Borealis company........................................................115
5.3 Recommendations...........................................................................116
5.4 The ‘beyond budgeting’ journey towards adaptivemanagement...122
5.5 Areas for further research study......................................................127
6.0 References.......................................................................................128

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List of tables:
1. How the budget underminesthe various budgetingmodels............................................32
2. Comparingtraditional andbeyondbudgetingprocesses.................................................71
3. The principlesof the coherentmodel...............................................................................74
4. How leadersneedtochange tomeettoday’scompetitive successfactors...................75
5. The three conditionsrelatedtofive majorresearchstrategies.......................................92

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List of figures:
1. Structure of the researchstudy..............................................................................................10
2. Evolution.................................................................................................................................15
3. Outline of the budgetaryprocess...........................................................................................19
4. Budgetaryprocess...................................................................................................................22
5. Illustrationof masterbudget....................................................................................................24
6. Pitfallsof conventional budgeting.............................................................................................29
7. Purposesof budgeting...............................................................................................................36
8. ABCand ABB compared.............................................................................................................39
9. UsingABM foroperational improvementsandstrategicdecisions...........................................40
10.. Outputsof the ABMmodel......................................................................................................42
11. A model of ABB..........................................................................................................................43
12 Overview of the ABBapproach...................................................................................................46
13. Summaryof the rollingbudget..................................................................................................48
14. Summaryof ABB........................................................................................................................49
15. A brief historyof zero-base budgeting......................................................................................50
16. Decisionpackage form...............................................................................................................53
17. Formulationof decisionpackages..............................................................................................55
18. Summaryof ZBB.........................................................................................................................58
19. Management’sinvolvementinthe zero-basedbudgeting........................................................60
20. Advantagesof beyondbudgeting..............................................................................................62
21. Summaryof beyondbudgetingmodel-private sector...............................................................67
22. Summaryof beyondbudgetingmodel-publicsector.................................................................70
23 Traditional budgetingmodel versusthe beyondbudgetingmodel............................................72
24. Managementtoolsandtheirrelationshipwithbudgeting........................................................77
25. Using BSC as a strategicmanagementsystem..........................................................................79

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26. Linkingstrategytobudgetsina step-downprocedure................................................................81
27. Balance Scorecardstrategymap..................................................................................................82
28. The principlesof astrategyfocusedorganization........................................................................83
29. Impactof advancedbudgetingtechniqueson oldtraditional budgeting.....................................86
30. The budgetperformance cycle....................................................................................................105
31. Breakingthe budgetatBorealis-the fourpillarsof the budget-lessorganization.......................115
32. Separatingperformance managementfromfinancialreporting.................................................116
33. The beyondbudgetingidea;the continuousadaptive process....................................................121

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Chapter 1-Introductiontothe ResearchStudy
1.0 Introduction
Budgetingis“still regardedasanorganizational imperative if costsare to be controlled andfinancial performanceto
be achieved”(Frow,Marginson, Ogden.,2010). However,traditional budgetsare seenbypractitionersof being
incapable of meeting the demands of the competitive environment(Ekhol andWallin,2000, p. 1; Østergren and
Stensaker,2011, p. 150) and are heavilycriticizedforimpedingefficientresource allocation,encouragingmyopic
decisionmakingandencouragingbudgetgames
(Otley,2003; Hansen et al.,2003; Hope and Fraser,2003). At the same time there seemstobe little empirical
evidence of organizationsadoptingneworadjusted budgetingpractices (EkholmandWallin, 2000).
Beyondbudgetingis:
‘An idea thatcompaniesneed to movebeyond budgeting becauseof theinherentflawsin budgeting
especially when used to set contracts.Itis argued thata rangeof techniques,such asrolling forecastsand
marketrelated targets,can takethe place of traditionalbudgeting.’
CIMA OfficialTerminology,2005
BeyondBudgetinghasbeenproposedasan influentialideathatwill reinvigorate managementaccounting
contributioninbusiness operationandperformance.Itisclaimedthatthe traditional system
has lostrelevance withthe modernbusinessenvironmentandisno longersatisfyingthe needsof managers.
Budgetshave beeningrained inthe culture of businesssince theirinceptioninthe 1920s and
managerswill finditextremelydifficulttoradicallyshifttoasystemwithoutbudgets.The implicationsof aBeyond
Budgetingsystemare; performance measuresrelative tocompetitorsanda decentralized
organization structure.
Alternativessuchasthe rollingbudgetingandactivitybasedbudgeting techniquesmaybe more favorable to
managementwhodesiresaformal planningandcontrol system butthe problemisthattheyare evenmore time
consumingthanthe traditional budgetingtechniqueshence maynotbe consideredasanappropriate substitute
managementcontrol tool.The BeyondBudgetingconceptis still initsinfancyandrequiresfurtherdevelopmentand
practical implementation.
Hope and Fraser(2003) contendedthatthe budgetingsystem, asimplementedbymostbusinesses,
shouldbe eradicated.The budgetingdebate hasarisendue toamovementintothe informationage (Drury,2008).

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Thisthesis discusseshowbudgetinghasevolvedintoits currentstate,before examiningwhythisuniversal
technique hascome undersuchheavy criticismof late.The limitationsandweaknessesof usingthe traditional
budgetingsystem asamanagementtool will be assesseddoingthe appropriate literaturereview..Atthe core of this
researchstudy isthe evaluation whetherthe BeyondBudgetingmodel ismore relevantintoday’s business
environmentandif itcan be a prominent managementtool inthe future practicesof managementaccounting
1.1 Research Background
I choose a qualitative studyinordertoanswerthe researchquestions. The directorsof this chosen company
wantedthe name of the companyto remainanonymoushence Iwill onlyrefertoitas Case studyA.
Gerring,(2004:341) suggeststhatregretfully,the term“case study”isa definitional morass. Toreferto a work as a
case studymightmean(a) that itsmethodisqualitative, small-N (Yin1994);(b) that the researchis ethnographic,
clinical,participant-observation,orotherwise“inthe field”(Yin1994); (c) thatthe researchischaracterizedby
process-tracing(George andBennett2004);(d) that the researchinvestigatesthe propertiesof asingle case
(Campbell andStanley1963, ; Eckstein[1975] 1992); or (e) thatthe researchinvestigatesasingle phenomenon,
instance,orexample (the mostcommonusage).
Case StudyA isa local medium-sizedcompanybasedinKenyaandwasestablishedinthe 1990’s; itoperatesina
competitivemarketwithshiftingconditions. Ithasa few directorswhoare at the same time shareholders. I had an
opportunitytoworkinthat companyand realizedthatthe budgetingprocesswasnotalwaystakenseriouslyby
boththe executive managementandthe subordinate staff. Inthe past capital assetshave beenboughtwithoutany
formal analysisdone andoutside the budgetedfiguresconsequentlythe companyincurredabig bankloanand has
beenrunningona bankoverdraftto finance itsworkingcapital.
The banks have of late compelledthe companytocarry outbudgetingastheyneedtosee the companyvari ous
budgets tosee whetherthe companywill defaultonthe interestpaymentsandloanpayments. The budgetsare
usedinthe companyas a performance evaluator forall itsstaff and alsousedas the ultimate managementplanning
and control tool.
The budgetingprocessusedisthe oldtraditional budgetingprocess,financial indicatorsare the onlyKey
performance indicatorswhile the non-financial indicatorsare largelyignored,itisatop downapproach budgeting
approach andbudgetstargetsare imposedonthe lowermanagementlevels. The managementstyle isautocratic,
goodachieverswhomeetthe budgetedtargetsare rewardedwithadditional bonuswhilenon-achieversare
severely punishedand insome casesactuallydismissed fromwork thusthere isahighturnoverof staff. There is

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hardlyany participative budgetingstyleadoptedinthe company,communicationandco-ordinationof activitiesis
usuallypoor. The variance analysis isusually done atthe year-endbythe accountantbutisrarely givenback as
feedbacktothe subordinate staff toenable themimprove orcorrecttheirprocesses.
1.2 Problemstatement
Case studyA for manyyearshas usedthe traditional budgetingasa managementtool,theyhave notalways
preparedthe annual budgets some years back,the annual budgetwasnot preparednot because the companywas
practicingbeyondbudgetingbutthe mainreasonwasthe accountant’slack of knowledge onthe budgetingprocess
or importance of budgets. Thusthe company is notable to complywiththe annual budget. The problemsthatface
case studyA are numerous,tostart with,the budgetaryprocessis usuallyatopbottommanagementandis not
punctual and the budgetworkscounterproductive due tothe unrealistictargets.
Secondly,the performanceculture isunsatisfactory. AtCase StudyA, the participantsof the budgetaryprocessdo
not always workas a team,there isa lot of gaming,dysfunctional behaviorandincongruence inthe company inthat
certainindividuals only strivetoattaintheirowngoals while overlookingthe importance of the overall
organizational objectivesandgoalsandonlya few individualstrytorealistic achieve the companybudgetswhichare
useful andveryhighbutat leastattainable. Therefore,synergiesfromrunningefficientprocessesand
accountabilityare fullymissed,andthe budgetmissesitspurpose asa planningand control managementtool for
the organizationdue lackof communicationandco-ordinationof activities
And thirdly,the companyhasnumerousbankoverdraftsandloanstherefore the topmanagementis always
compelledtoprepare budgetsforthemmainlythe cashbudgetandthe budgetedincomesstatementandbalance
sheetforthe nextfive yearstosatisfythe bankconditions
Therefore,itisnecessaryto critical assess traditionalbudgetingasamanagementplanningand control tool andalso
lookat the criticismof thistool and the personincharge of the budgetingprocess.The availableliterature and
analysisshouldshowwhetherthe traditional budgetingprocessis still avalidmanagementcontrol tool or
alternative budgetingtechniquesare bettertools.

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1.3 Purpose of the study
Many organizationsmainly use the traditional budgetingprocessasa managementtool toplanandcontrol the
businessoperationsandinordertoassessthe relative importance of havingapropertool forbudgetingand
criticismof usingthattool at organization- Case studyA. The traditional budgetingprocessisdiscussedindepthis
compared to the alternative budgetingtechniquesthathave beendevelopedrecently.
The thesiswill contributetoa betterunderstandingof the traditional budgetingprocessinaholisticwayandto
explainthe weaknessesof budgetarycontrol thathave beenfoundinthe literature.A goodunderstandingof the
budgetingprocessisanecessityforelaboratingonthe alternative budgetingtechniquesthathave beendeveloped
to overcome those weaknesses.
1.4 Objectivesofthe Study
To fulfil the purpose of the Research,the followingobjectiveswillbe addressed.
(i) To describe and examinethe budgetingprocessat Case StudyA and make recommendationsonhowto
improve it
(ii) To contribute tothe available literature byexploringthe traditionalbudgetingasamanagement
planningandcontrol tool and consideringthe alternative methodsof budgeting.
(iii) To describe and examinethe budgetperformance of Case StudyA andmake recommendationonhow
to improve whileconsideringthe alternativestothe oldtraditional budgeting andhow theycanbe
implementedinthe company
(iv) To describe andestablishthe relationshipbetweenthe budgetingprocessandbudgetperformance and
make suggestionsonhowtoimprove it.
(v) Criticallyevaluate the importance of the oldtraditional budgetingasamanagementplanningand
control tool at Case studyA.
1.5 Research Questions
(i) What isthe budgetingprocessat Case StudyA
(ii) Whatisthe budgetperformance of Case StudyA
(iii) Whatisthe relationshipbetweenthe budgetingprocessandperformance in Case StudyA
(iv) ShouldCase StudyA Ltd abandonthe traditional budgetingpracticesandadoptotheralternative
budgetingtechniqueslike beyondbudgetingapproach.

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1.6 Significance of the Study
(i) The studywill benefitthe Shareholders,directorsandthe managementteamof Case StudyA by helpingthem
finda solutiontothe problemof poorbudgetperformance.
(ii) The studywill be usedbyacademiciansandotherresearchersfor furtherresearchwork.
(iii) Make suggestionsandrecommendations thatwill goalong wayinimprovingthe qualityof the budgeting
processthat will improve budgetperformance at Case StudyA
(iv) The study will be usedtoassessthe linkage andrelationshipbetweenbudgetingprocessand
performance.
1.7 Scope of the Study
(i) The studywas focusedonthe budgetingprocessintermsof level of participation,degreeof feedbackandcontrol
and overall budgetperformance.
(ii) Generallyassessthe importanceof havingbudgetingasa managementtool andcriticizingthe importance of that
tool.
1.8 Assumptionsof the Study
The researcher made the following assumptions regarding this study:
i. Participantsansweredthe interviewandsurveyquestionsabout budgets and budgeting process within the
organization truthfully.
ii. Participants were familiar enough with the budgeting process to answer the survey questions.
iii. The researcherexpectedthe entire exercise to move on smoothly relying on the maximum cooperation of
all those who were involved. That the case study was ideal to examine the traditional budgeting as a
management tool and also assess the alternative methods of traditional budgeting, the data collection
instruments had validity and measured the desired parameters and that the participants truthfully and
correctly answered the questions.

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1.9 Limitationsof the Study
Limitationsare potentialweaknessesorproblemswiththe studyidentifiedby the researcher. The limitations often
relate toinadequate measures of variables,lossor lack of participants, small sample sizes, errors in measurement,
and other factors typically related to data collection and analysis. These limitations are useful to other potential
researchers who may choose to conduct a similar or replication study (Creswell, 2005).
The limitations of this qualitative case study include;
i. The study involved the perception of participants of a budgeting process but was only within one
organization-Case Study A.
ii. Perceptions of those who participated are not factual information and are biased based on the
participant’s own experiences and attitudes.
iii. The expanse of the study area, inadequate financial resources and time constraints also reduced the
chances of interviewing more participants and reviewing in details the budgeting process over a given
period of time.
iv. Concern that case studies lack rigor: Case studies have been viewed in the evaluation and
research fields as less rigorous than surveys or other methods. Reasons for this include the
fact that qualitative research in general is still considered unscientific by some and in many
cases, case study researchers have not been systematic in their data collection or have
allowed bias in their findings.
v. Not generalizable: A common complaint about case studies is that it is difficult to generalize
fromone case to another.Butcase studieshave alsobeenprone toovergeneralization, which comes from
selecting a few examples and assuming without evidence that they are typical or representative of the
population.

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1.10 Mitigation factors to the study
These limitations were mitigated by making sure that;
i. The data was collected from individuals who were closely involved or participated in the budgeting
process and knowledgeable enough for this study.
ii. In writingthe case study,care was takento provide the richinformationinadigestible manner by using
a lot of diagrams and simple illustrations.
iii. In conductingandwritingthe case study, care has been used in being systematic in the data collection
and take steps to ensure validity and reliability in the study and bias findings was also avoided.
iv. Yin,a prominentresearcher,advisescase studyanalyststogeneralizefindings to theories, as a scientist
generalizes from experimental results to theories
, iv The case studyshownwasappropriate throughpilotingandcareful scrutinyof the perceivedparameters
involved in the budgeting process.
1.11 Delimitationstothe Study
Delimitation narrows the scope of the study. The follow were delimitations of this study:
i. Participation in this study was voluntary.
ii. The case study only covered the budgeting process in details in one organization.
1.12 Definitionofterms
Budget:
Bhimani,Horngren,Datar& Foster,(2008) define abudgetasa quantitative future plancreatedbymanagersto
assistthe implementationof thisplan. A budgetisan agreeduponplan,expressedinfinancial terms,againstwhich
performance tobe realizedinthe future ismeasuredandcompared(de Waal etal.,2004).
Shimand Siegel,(2009) gave the mostcomprehensivedefinitionof abudgetas a follows;
“A budgetis defined asthe formalexpression of plans,goals,and objectivesof management
thatcoversall aspectsof operationsfora designated timeperiod.The budgetis a tool
providing targetsand direction.Budgetsprovidecontroloverthe immediate environment,help

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to masterthe financialaspectsof the job and department,and solveproblemsbeforethey
occur.Budgetsfocuson the importanceof evaluating alternativeactionsbeforedecisions
actually are implemented.
A budgetis a financial plan to controlfutureoperationsand results.Itis needed to operate
effectively and efficiently.Budgeting,when used effectively,is a techniqueresulting in
systematic,productivemanagement.Budgeting facilitatescontroland communication andalso
providesmotivation to employees.”
As such,the budgetisa financial reflectionof the organization’sannual operatingplan,whichinturnisa translation
of the long-termstrategicobjectivesintoshort-termactions.
Budgetingprocess
The budgetingprocessisthe iterative processinwhichthe budgetisdeterminedinseveral roundsof dialogue
betweenhigherandlowermanagementlevels.Thisdialogue resultsinaperformance contractbetweenlowerand
highermanagement,stipulatingthe targetstobe achieved.Throughoutthe year, the organizationchecks regularly
(oftenmonthly)whetheritisstill ontrackto reach itstargets.Thus, the budget isoftenusedforcontrol purposes
withinthe organization.
1.13 Structure of the study:
Chapter1: Thisresearch studyaimsto 1) assesscriticallythe oldtraditional budgetingprocessasaplanningand
managementcontrol tool,itscriticismsandatthe same time evaluate the otheralternative budgetingtechniques,2)
discussthe budgetingprocessandperformance andsuggestsolutionsand3) To describe andestablishthe
relationshipbetweenthe budgetingprocessandbudgetperformance andmake suggestionsonhow toimprove it.
Chapter2 will focusonthe literature review of budgeting. Itsstartswithdiscussing the theoryand evolutionof
budgeting,thenotherdescriptionsof budgeting,the usesandtypesof budgets,criticismsof the oldtraditional
budgeting,the commonbudgetingstylesusedbycompanies andotheralternativesof budgetingare alsodiscussed
indetails

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Chapter3 It does discussthe researchmethodologyusedinthisstudy. Itelaboratesonthe criticismsof the prior
researchmethods. Italsoexplainsthe reasonwhythe qualitativemethodof datacollectionwaspreferredoverthe
quantitative one,the rationale of the researchapproachusedandalsoethical considerationsare explainedindepth.
Chapter4 The chapterfocuses mainlyonthe findings,analysisanddiscussionof the researchresults. The chapter
explainsthe currentproblemsfoundin Case StudyA,budgetary processbasedon itsweaknesses. The use of the
budgetsasa performance evaluatorandasa managementcontrol tool isevaluated. The oldtraditional budgeting
process isbenchmarkedagainstthe otheralternativebudgetingtechniques like activity-basedbudgeting(ABB),
Zero-basedbudgeting,beyondbudgetingtechniquesandthe like thathave been developedrecently decadesto
overcome those weaknesses.
Chapter5 will summarizethe main conclusions fromthis researchstudy.Itwill alsodiscussthe recommendations
and implications forundertakingfurtherresearchinthisfield.
Basedon the outcome,anoverviewof the actionsandcontrolswill be giventoensure the bestviablebudgeting
solutionforCase studyA.

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Figure1: Structure of the Researchstudy
Chapter 1: Introduction of the Research study
Problemdefinition, research purpose andobjectives, andstructure ofthe thesis
Chapter 2: Literature Review on budgeting ingeneral
TheoryandEvolutionof budgeting, Usesand types ofbudgets, budgetingtechniques
Chapter 5: Conclusions
Conclusions, recommendations andfurther researchwork
Chapter 3: Research Methodology
Criticisms of priormethods, rationale forthe qualitative approach andethical considerations
Chapter 4: Findings/Analysis and Discussions of the results
Budgetaryprocess andproblems, alternative budgeting techniques reviewed

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Chapter 2: LITERATURE REVIEW ON BUDGETING
2.0 Introduction:
Thischapter mainly focusesonthe literaturereview of budgeting ingeneral.Itsstartswithdiscussingthe theoryand
evolutionof budgeting inthe developednationslikeFrance,GreatBritain,the UnitedStates,the evolutionof
budgetinginthree economicwave is alsodiscussed. The otherdescriptionsof budgeting are given,the usesand
typesof budgets are explained,the criticismsof the oldtraditional budgeting asa planningandmanagementcontrol
tool is discussed,the commonbudgetingstylesusedbycompaniesandotheralternativesof budgeting processes
are elaboratedonandtheirsuitabilityincomparisontothe oldtraditional budgetingtechnique isalsocritically
assessed
2.1 Theory and Evolution ofBudgeting
2.1.1 The Theory of budgeting
In social sciencesatheoryisa testable model of humaninteractionscapable of predictingfuture occurrencesor
eventsof the same kindas well ascapable of beingtestedthroughexperimentorotherwise verifiedthrough
observation.Budgetingdoesnothave atheoryinthe classical sense of providinganorientationtothe field,stating
assumptionsandpointingtosome hypothesesaboutwhatcauseswhat(Rubin1997).
Accordingto Rubin,budgettheory“isfragmentedandincomplete…[it] isinthe process of beinginvented”(Rubin
1997: 185). Inother words,the theoryof effectivebudgeting iscontinuallyevolving.Scholarssee “the studyof
budgetingaspart of a largerresearch agendawhichwouldultimatelyenable prediction of consequencesandthe
comparative analysisof governmentalpolicy”(Caiden1994: 44).
Many budgetpolicies,procedures,andtechnical practicesthatwe currentlyassociate withmodernbudgetingwere
developedduringthe nineteenthcenturywhenmajorchangesinbudgetpracticesoccurredinFrance.Atthe time
Napoleon’sprimaryconcernwaswithmasteringthe militarybudget.Toobtainbetterinformationandcontrol on
militaryspending,Napoleon establishedthe CoursdesComptes(WebberandWildavsky 1986).

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2.1.2 Evolution of budgetinginFrance
Early 19th centuryFrance sawthe establishmentof the wordsbudgetandbudgetaryprocedures.Bythe 1860s,
France had developedauniformaccountingsystemthatitappliedtoall departmentsandunitswithindepartments,
a standard fiscal year,conventionsonhowlongencumbrancescanbe heldopenafterthe close of the fiscal year,
and a requirementthatall departmentsexplainprogrammaticallyandaccountfiscallyforall fundswhichtheywere
allocated.The budgetwasconsideredtobe one of the government’sprimarypolicydocuments.Indeed,the control
of governmentexpenditureswasassuredthroughthe schedulingof expendituresbydifferentdepartments.
Expenditure claimsthatexceededabudgetcategory wouldnotbe honoredforpayment.
2.1.3 Evolution of budgetingin Great Britain
Britishbudgetarypracticesof the mid-19thcenturylackednotonlymanyof the technical featuresof the French
budgetarysystem,buthadnotadoptedthe emphasisonconsistencyanduniversalityof applicationthatwascentral
to the underlyingpublicsectorbudgetprocess.Forexample,althoughmostfundsunderthe mid-19thcentury
Britishsystemwere appropriatedbyParliament,there wasnosingulardocumentreflectingall government
expenditures,nocomparisonsbetweenbudgetedexpendituresversusactual expenditures,anddifferentaccounting
mechanismswhere usedbyvariousdepartments.Lumpsumappropriationswere widelyused.Duringthe period
whenWilliamGladstonewas Chancellorof the ExchequerandlaterPrime Minister,he andotherreformers
integratedmanyof the more advancedfeaturesof Frenchbudgetarytechniquesasa wayof controllinggovernment
finances.
For example,in1861 the PublicAccountsCommittee wascreatedinEngland.
In 1866, the officesof the Comptrollerand AuditorGeneral were created.
Gladstone emphasizedthe notionof balancingthe budget.
Thisprincipal became atechnical feature of hisbudgets(WebberandWildavsky1986).
Thus bythe endof the 19th centurythe frameworkformoderngovernmentbudgeting
(unity,balance,comprehensiveness,andcontrol) hademergedinEurope.

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2.1.4 Evolution of budgetingin the UnitedStates
In contrastto Europe,budgetreforminthe UnitedStateswas initiallyestablished atthe local notnational
governmentlevels.Thiswasinpartdue to the fact that the public hadmore directcontrol overlocal activities.Mass
immigration,coupledwithincreasing industrializationandurbanization,createdlarge demandsuponlocal
governmentsforhousing,education,healthcare andtransportation(Rabin1997; WebberandWildavsky 1986).
To more efficientlymanage theseincreasingdemandsongovernmentservices, Standardized accounting,reporting,
and auditingpracticeswere introduced.
The budgetingprocessinthe UnitedStateswaslargelyimpactedbytwocompetingcoalitions:
(1) The Federalists(Whigs) whosupportedanactive governmenttopromote commerce,buildinfrastructure
necessaryforeconomicactivity, anddevelopthe financial institutionsnecessarytosupporteconomicgrowth;and,
(2) The Republicans(DemocraticRepublicans,thenlaterDemocrats) whobelievedthattaxesshouldbe keptlow
and governmentkeptata minimumsothatsmall farmersandtradesmancouldfreelypursue theirtrade without
governmenthindrance (Rabin1997).
Competingcoalitionswere keptinequilibriumthroughthe normof abalancedbudget.The normof a balanced
budgetsolidifiedintoapractical limitationongovernmentactivity.Ratherthandevelopingthe technical capabilities
to control spendingaswasoccurring inEurope,the UnitedStatescontrolledbudgetaryoutlayssimplybykeeping
the governmentsmall (WebberandWildavsky1986).
Congressitself hadnomechanismtoensure thatappropriate spendingwasbeingimplementedwithout
modifications.
To addressthe problemsof mountingdebt,the fragmentationof powerandthe absence of publicaccountability
and control incombatingcorruption19th and 20th
century budgetreformersinthe U.S.proposedanarray of
improvementsincludinguniformaccountingandauditingpractices,andaseriesof practicesforfinancial planning
and administrationthatcame to be knownas the executive budgetmovement.Central tothe reformsinthe U.S.of
thisera wasthe conceptof the responsible executive (i.e.,astrongmayor).Ineffect,reformerswere adoptingmany
of the businesspracticesof the daywithstrongexecutiveauthority(i.e.astrongbusinessexecutive).The first

14
principal of thismovementbecamethatbudgetsshouldbe developedandproposedbythe executivetoaccomplish
statedobjectivesforwhichthe executive wouldlaterbe held accountable tothe voters.
For fiscal clarity,budgetswouldbe unifiedandencompassnot onlyexpendituresbutalsorevenues.Publicsector
budgetingwouldessentiallyfollowthe practice of Americancorporationsbybeingcomprehensive,balancedand
annual (Taylor1911).
A uniformaccountingsystem, the establishmentof acomptroller,andprotocols forbothreportingandauditing
wouldaidthe developmentandimplementationof the budget.
A keydevelopmentinbudgettheoryhasbeenthe differentiationbetweenmicrobudgeting andmacro-budgeting
and the inherenttensionbetweenthem(LeLoup,1988).
Macro-budgetingiswhere highlevel decisionsonspending,revenue anddeficit aggregatesandrelative budget
share are oftenmade fromthe top down.Micro-budgetingiswhere intermediatelevel decisionsonagencies,
programs,and line-itemsare usually made fromthe bottomup.Bothlevelsof budgetinganalysisare interestedin
howpowerisstructuredinbudgetaryprocessesaswell ashow it isexercisedandexpressedthrough budgetary
choices.These techniqueshelpedtolinkbudgetingtoalarger agendaof improvingpublicsectorperformance.
The evolutionof budgettheoryandpolicy-makingpracticesillustratesthat undeniable progresshasbeenachieved,
oftenonmodestfrontsandwithreasonably simpletechniques.Budgetpracticesacrossthe globe have been
graduallyevolvinginto becomingmore uniformwithrespecttoaccountingandauditingpractices,balance,and
control.Lost inthe evolutionof effective budgetingpracticesisthe identificationof demandside (social
accountabilitytothe local community) issuesof identificationof
needs(budgetplanning),managerial efficiency(budgetexecution),andeffectivenessof implementation(budget
execution).

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2.1.5 Dramatic changesin budgeting
In the 1980s and 1990s, bothnational andsubnational governmentshave witnesseddramaticchangesinbudgeting.
Alongthe way,decentralizationbecameanimportantcomponentof publicsectorreformeffortseliminatingthe
planningbureaucracy’smonopolyoverthe budget.Inmanycountries“[w]idespreadinterestindemocratization
encourageddevolutionof authoritytoautonomousmunicipal governmentsascounterweightstothe centralized
governmentsof the past,andinholdingregularlyscheduledelectionstotransferpowerfromtraditionalnational
level rulingelitestoaccountable electedofficials”(Guess1997:248).
In these countries,transitionfromcentrallyplannedsystemstodemocraciesledtoa demandforgreater
accountability,whichinreturnrequiredatransparentfinancialmanagementsystem.
An ongoingchallengeforcountriesinimplementingdecentralizationprogramsistodevelopcoordinatedbudgetary
and financial managementreformpoliciesacrosslevelsof governmenttoensure correspondence withnational
macroeconomicobjectivesforinflation,growth,fiscal andmonetary stabilization (Ter-Minassian,1997) and linking
betterbudgetformulationandexpenditure processestoproactive civilinvolvementand oversight.
Figure 2: Evolutionof budgetingwithinthe three waves of economicchange:

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2.1.6 Evolution of budgetingwithinthe three wavesof economicchange:
In the informationanddigital erawithinwhichcompaniesoperate today,the keycompetitiveconstraintisnolonger
land,laboror capital. It is knowledge orintellectual capital,competentmanagers,skilledworkers,effectivesystems,
loyal customersandstrongbrands (Hope andFraser,1997:20).
Thisis the periodtheycall “informationwave”,inwhichthe waya successful companyoperatesisshiftingfroma
“make-and-sell”toa “sense-andrespond”approach.
“Make-and-sell”isanindustrial-age model basedontransactions,capital assets,massproduction,economiesof
scale and productmargins,while “sense-andrespond”isaninformationandservice age model whichemphasizes
clientrelationships,intellectual assets,masscustomization,economiesof scope andvalue creation(Fraser,2001,24)
If we closelylookatthe timeframe inthe above figure,itcanbe notedthat advancedbudgetingmodelshave been
developedonlyrecently. Inmy ownopinion,these modelsportrayanatural response fromcompaniesthathave
had to slowlyevolve inordertoavoidextinctionandcontinue survivinginthe currentmarket.
2.2 Other descriptionsof a budget and budgeting
A budgetis a periodicquantitative andfinancial expressionof future plansof action. Budgetingisthe processby
whichthe plansof action are chosen,coordinated,communicatedandevaluatedinthe organization.Thismeans
that budgetingconsistsof bothaplanninganddecisionmakingex ante aswell asmonitoringandperformance
measurementex post.Itmustlikewisebe noticedthatbudgetingischaracterizedbybeingperiodiceconomic
managementthathasto be coordinatedwiththe strategicobjectivesanddecisionslike choice of placement,
technology,markets,customersetc.onthe one handand the operational daytoday decisionsonthe other.There
are several factorsthatmake budgetingimportantfordecisionmakingandmanagementcontrol tool.
2.21 Uses of budgets
Firstly,budgetingplaysacrucial role inthe goal setting (targetsetting) procedure inmanyorganizationsasitsets
the standard forthe performance inthe comingperiod.Asmentionedearlierresearchfromdifferenttheoretical
standpointshasovertime paida lotof attentiontothe effectsbudgetparticipationintargetsettinghason
organizational performance.Likewisethe relationshipbetweenbudgettargetachievability(budgetdifficulty) and

17
performance hasgainedinterestasa researchobject.While there are anagreementinthe literature onthateasy
achievable targetsleadstopoorperformance there maystillexistsdifferencesinthe perceptionof how stretched
the targetsshouldbe to optimize the performance.While manyargue thatthe probabilitytoachieve budgettargets
islessthan 50 percenta classical studycarriedoutby Merchant& Manzoni (1989) findthattargets can be
challengingfororganizationsevenif theyare likelytobe achieved.
Secondly,budgetingopensupforthe possibilitytoefficientlyorganize the decision making and planningprocess in
the company.The circumstance that the companybecomesable toseparate the decisionpointsfromthe time of
executionof actionsleadstoareductionof the time pressure onthe organization.Thathappenswhenthe company
inits budgetdocumentsitsplannedactions,includingdate of executionandwhichpersonsandorganizational units
that will participate.If the companyplansa salescampaign,salesmaterialisfirstdesignedandproducedtoensure
that brochures,TV-commercialsetc.are readywhenthe salesseasonstarts.Butitalsohappenswhenthe decisions
requiresasignificantlyamountof analytical work.Thatistypical forstrategicdecisionslike marketdevelopment,
productdevelopmentorimplementationof new technology.These typesof decisionsrequiresaconscious
managementof the analytical andideageneratingworkthatprecede the choice of a new strategy.Inthat
connectionthe strengthof budgetingis,thatthe companyforeachbudgetperiodcandecide,whichdevelopment
tasksthat shall be carriedout, whoshall be involvedandwhenthe tasksshall be carriedout.
Thirdly,budgetingopensuptoa higherdegree of decentralization incertainphasesof the decisionmakingprocess.
It is,thus,possible toletdifferentpersonsinthe decisionmakingprocessthanthe onesthatwill have toexecute the
decision.Thiscanbe personswithknowledge withinmarketanalysis,advertising,planningasalespromotion,after
whichthisisprimarilycarriedoutby the company’ssalespeople.Anotherexamplecouldbe toinclude accountants
and productengineersinpreparationof the companysalesplanwiththe purpose of controllingsaleswithfocusof
profitabilityandthe utilizationof scarce productioncapacity.
Fourthly,control of a company’seconomyassumesthatthe company’s resources can,as far as possible,be adjusted
to the expectedlevel of activity.The opportunityforacquiringanddisposingof resourcesisnaturally controlledby
the opportunitytoadjustresourcestoactivitywhichisconditionedbyresourcesvariabilityandreversibility.
Resource adjustmentalsoappliesinsituationswhere the companyisateitherfull capacityorat capacitydeficiency
and where the capacityistherefore actingasa capacity constraint.Insuch situationsperiodicplanningwith
budgetingisone wayof ensuringthatthe scarce capacityis usedinthe besteconomicwaypossible.
Fifthly,budgetinggivesthe opportunitytoensure coordination of activitycreationacrossbusinessfunctions.By
coordinationisinthiscontextunderstoodas thecoordination of decisions inseveral instances.The needfor
coordinationariseswhenmore functionsororganizational departmentstogetherhave toparticipate inthe business
activity. Intradingcompaniesitcouldbe purchasingandsale,inmanufacturingcompaniesthisalsoincludes

18
productionandinservice companiesitcanbe the differentspecialistfunctionsthatworktogether.Butthe need for
coordinationalsomayexistwhenitcomestothe company’sotherfunctionssuchasHR, finance andresearchand
development.A numberof the tasksperformedbya HR departmentlike hiringandfiringof employees,employee
trainingandthe development of employee policiesare largelycontrolledbythe “demand”fromthe other
departmentsof the company.Thisrequirescoordinationandconcerningthe periodicfinancialcontrol,the budget
acts as a central coordinationmanagementtool.

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Figure 3 Outline of the budgetary process.
Source:Adaptedfrom Lucey (1993) pp332

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2.3 The process of budgeting
The budget traditionally flows out of the mission statement and organization strategy. The mission statement is
worked out into a strategy which will be the main goal for the organization for the upcoming years. A concrete
financial plan is composed from the strategy containing the financial consequences for the upcoming year. This is
the budget.The management communicates the budget through the top-down method. The top-down method is
one of the maincharacteristicsof the budget,andmeansthat the informationcomesfromabove;the management,
and movesdowntowardsthe line management.The linemanagersthenformulate theirownbudgetand year-goals
and sendtheirplansback(bottomup) to the management.The managersandthe line managers then discuss pl ans
inorder to reacha final budgetandyeargoal.Next,the budgetisusedtocontrol whether or not the organization is
still ontrack e.g.controllingwhetherthe goals,setinthe strategy,are beingreached. If necessary, the organization
takescorrective measures.Atthe endof the year the evaluation and rewarding takes place. A comparison is made
betweenthe goalssetinthe budget,andthe goalsreachedbythe staff.The diagram below givesaclearoverviewof
the above mentioned process.
At Case studyA thisalternative budgetingprocessisimplementedratherthanthe priorbudgetingprocessasthe
operationsforthe companyare local and not complex.

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Figure 4: An Alternative budgetingprocess
2.3.1 Budgeting process at Case Study A
In orderfor the budgettobe inuse from the start of the nextfinancial year,budgetingprocessstarts
three to five monthsbefore the fiscal yearchange.
The budgetcan is dividedintothree parts:
1. Revenue turnover,
2. Direct costsand
3. Indirectexpenses.
Directexpensesrelate directlytorevenueasthey,ina service company,containsalarycosts.Theyare quite easyto
justifyastheycan be linkedtorevenue levels.Indirectorsupportingexpensesare hardertojustifyandtheir
allocationwithinthe organizationcanbe complex asthe companydoesnotuse the ABC costingmethod.
In myopinion,budgetingisaback-and-forthmovementbetweenthe topandlowermanagement.
In a top-downapproach like inthisCase StudyA scenario,detail-level plansare givenfromthe executive
managementforwhichthe sub-unitbudgetsare basedon. Thismeansthat the uppermanagementfirstgivesout
broad overall objectivesandthe constraintsof the company.Thenthe lower-levelmanagers work tomeetthe
budgettargets basedon theirownexpectationsandknowledge.

23
However, if the lower-level managersare notactivelytakingpartintothe process,theywill notcommitthemselves
to the setobjectives.
Commitmentisvital asthe effectiveness of budgetingprocess dependsonit.
Whenmanagerstake part insettingtheirownunit’sobjectives,theyare more likelytotake responsibilityforthose
objectivesandcanbe held accountable. Astheytake the settargetsas their own,theywill strive toachieve them.
While creatingthe budget,the corporate level goalsmust be takenintoaccount,butin orderto make the budget
realistic,itsgoalsandfigurescannot simplybe dictatedfromabove,since the lower-levelmanagersusuallyhave a
deeperunderstandingontheirunit’sbusinessthanthe finance orthe uppermanagement .

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Classificationof budgets
Figure 5:Illustrationof Master budget
Source: Adapted from Horngrenand Foster (1991) pp177

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2.4 Classificationof budgets
Horngrenand Foster(1991) suggestthe followingasclassificationof budgets:
There are countlessformsof budgets. Manyspecial budgetsandrelatedreportsare preparedincluding:
-Comparisonsof budgetswithactual performance (performancereports)
-Reportsforspecificmanagerial needs- forexample,cost-volumeprofitprojections
-Longterm budgetsoftencalled‘capital’or“facilities”or“project”budgets.
-Flexiblebudgets
-Life-cyclebudgets
Figure 2 showsa simplifieddiagramof the variouspartsof the masterbudget,the comprehensiveplan,a
coordinatedsetof detailedfinancialstatementsforshortperiods,usuallyayear. Asthe diagramindicates,many
supportingbudgetsare necessaryinactual practice. The bulkof the diagrampresentsvariouselementsthat
togetherare oftencalledthe operatingbudgetwhichisthe income statementanditssupportingbudgets.
In contrast,the financial budgetisthatpart of the masterbudgetthatcomprisesthe capital budget,cashbudget,
budgetedbalance sheetandbudgetedstatementof cashflows. Itfocusesonthe impacton cash of operationsand
otherfactors suchas plannedcapital outlaysforequipment.
For simplicity,figure5doesnot showall functions (forexample,research) andthe interrelationshipsamongthe
variousbudgets. Forinstance the amountof interestexpense onthe budgetedincomestatementisaffectedbythe
cash budget. Moreover,toavoidclutterthe figure doesnotemphasize thatonce the salesbudgetiscompleted,
purchasing,production,marketingandadministrativedepartmentscanoftenbe workingontheirbudgets
simultaneously. Similarly,the variousingredientsof the financial budgetare oftenpreparedsimultaneously.

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2.5 Problems withtraditional budgeting inpractice
A recentreportby Neely,Sutcliff,Heyns, (2001),drawnprimarilyfromthe practitionerliterature,
liststhe 12 mostcitedweaknessesof budgetarycontrol as:
1. Budgetsare time-consumingtoputtogether;
2. Budgetsconstrainresponsivenessandare oftenabarrierto change;
3. Budgetsare rarelystrategicallyfocusedandoftencontradictory;
4. Budgetsadd little value,especiallygiventhe time requiredtoprepare them;
5. Budgetsconcentrate oncost reductionandnot value creation;
6. Budgetsstrengthenvertical command-and-control;
7. Budgetsdo notreflectthe emergingnetworkstructuresthatorganizationsare adopting;
8. Budgetsencourage gamingandperverse behaviors;
9. Budgetsare developedandupdatedtooinfrequently,usuallyannually;
10. Budgetsare basedon unsupportedassumptionsandguesswork;
11. Budgetsreinforce departmentalbarriersratherthanencourage knowledge sharing;
and
12. Budgetsmake people feel undervalued.
While notall wouldagree withthese criticisms,otherrecent critiques(e.g.,Schmidt1992;
Hope and Fraser1997, 2000, 2003; EkholmandWallin2000; Marcino 2000; Jensen2001)
alsosupportthe perceptionof widespreaddissatisfactionwithbudgetinginpractice.We
synthesize the sourcesof dissatisfactionasfollows.
Claims1, 4, 9, and10 relate tothe recurringcriticismthatby the time budgetsare used,theirassumptionsare
typicallyoutdated,reducingthe value of the budgetingprocess.
A more radical versionof thiscriticismisthatconventional budgetscan neverbe valid because theycannotcapture
the uncertaintyinvolvedinrapidlychangingenvironments (Wallender1999).
In more conceptual terms,the operationof auseful budgetarycontrol systemrequirestworelatedelements.First,
there mustbe a high degree of operational stabilitysothatthe budgetprovidesavalidplanfora reasonable period

27
of time (typically the nextyear).Second,managersmusthave goodpredictive modelssothatthe budget providesa
reasonable performance standardagainstwhichtoholdmanagersaccountable (BerryandOtley1980).
Where these criteriahold,budgetarycontrol isauseful control mechanism, butfororganizationsthatoperate in
more turbulentenvironments,itbecomes lessuseful (Samuelson2000).
Claims2, 3, 5, 6, and 8 relate toanothercommoncriticismthatbudgetarycontrolsimpose avertical command-and-
control structure,centralize decisionmaking,stifle initiative,andfocusoncostreductionsratherthanvalue
creation.Assuch,budgetarycontrolsoften impedethe pursuitof strategicgoalsbysupportingsuchmechanical
practicesas lastyear-plusbudgetsettingand across-the-boardcuts.
Moreover,the budget’sexclusive focus onannual financialperformance causesamismatchwithoperationaland
strategicdecisions thatemphasize nonfinancial goalsandcutacross the annual planningcycle,leadingto budget
gamesinvolvingskillful timingof revenues,expenditures,andinvestments
(Merchant1985a).
Finally,claims7,11, and 12 reflectorganizationalandpeople-relatedbudgetingissues.
The critics argue that vertical,command-and-control,responsibilitycenter-focusedbudgetary controlsare
incompatiblewithflat,network,orvalue chain-basedorganizational designs andimpede empoweredemployees
frommakingthe bestdecisions(Hope andFraser 2003).
Givensucha longlistof problemsandmanycallsforimprovement,itseemsoddthat the vast majorityof U.S.firms
retaina formal budgetingprocess(97percentof the respondents inUmapathy[1987]).
One reasonthat budgetsmaybe retainedinmostfirms isbecause theyare so deeplyingrainedinanorganization’s
fabric(ScapensandRoberts1993). ‘‘Theyremainacentrallycoordinatedactivity(oftenthe onlyone) withinthe
business’’(Neelyetal.2001, 9) and constitute ‘‘the onlyprocessthatcoversall areasof organizational activity’’

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2.5.1 Additional Problems withtraditional budgeting
In the ACCA studytextof AdvancedPerformance management(2012:37), the Get through guide,postulates the
followingaspitfallsof traditional budgeting.
Advocatesof beyondbudgetinghave criticizedconventional budgetingprocessesonseveral counts. Itisclaimed
that budgets:
 Cannotcope witha fast-changingenvironmentandtheyare oftenout-of-datebeforethe startof the budget
period.
 Focustoo much managementattentiononthe achievementof short-termfinancial targets. Instead,
managersshouldfocusonthe thingsthat create value forthe business(e.g.innovation,buildingbrand
loyalty,respondingquicklytocompetitivethreatsandsoon).
 Reinforce a‘commandandcontrol’structure that preventsjuniormanagersfromexercisingautonomy. This
may be particularlytrue where a top-down approach,thatallocatesbudgetstomanagers,isbeingused.
Where managersfeel constrained,attemptstoretainandrecruitable managerscan be difficult.
 Take up an enormousamountof managementtime thatcouldbe betterused. Inpractice,budgetingcanbe
a lengthyprocessthatmay involve muchnegotiation, reworkingandupdating. However,thismayaddlittle
to the achievementof businessobjectives.
 Are basedaroundbusinessfunctions(e.gsales,marketing,productionandsoon). However,toachieve the
business’sobjectives,the focusshouldbe onbusinessprocessesthatcutacross functional boundariesand
reflectthe needsof the customer.
 Encourage incremental thinkingbyemployinga‘lastyearfigure plusa certainpercent’approachto
planning. Thiscaninhibitthe developmentof ‘breakout’strategiesthatmaybe necessaryina fast-changing
environment.
 Can protectcosts ratherthan lowercosts. In some cases,a fixedbudgetforanactivity,suchasresearchand
development,isallocatedtoamanager. If the amountis notspent,the budgetmaybe takenaway and in
future periods,the budgetforthisactivitymaybe eitherreducedoreliminated. Sucha response tounused
budgetallocationscanencourage managerstospendthe whole of the budget,irrespective of need,inorder
to protectthe allocationstheyreceive.
 Promote a negative mentalityamongstmanagers. Inordertomeetbudgettargets,managersaytry to
negotiate lowersalestargetsorhighercostallocationsthantheyfeel isreallynecessary. Thishelpsthemto
buildsome ‘slack’intothe budgetsandsomeetingthe budgetbecomeseasier.

29
 Moreover,one of the biggestproblemswithbudgetsisthattheytendtopromote an inward-looking,short-
termculture that focusesonachievingbudgetfigure,ratherthanonimplementingbusinessstrategyand
creatingshareholdervalueoverthe mediumtolongterm.
Figure 6: Pitfallsof conventional budgeting,Source:Adaptedfrom ACCA study text,(2012:37)
Otley(2003) believesbudgetsystemhasthe potential tocreate dysfunctionalbehaviour anddiscusseshis
experience of acoal mine thatheld backstock to meetweeklyquotas,anexampleof ‘Cookingthe Books’.

30
Wallander,formerexecutive forHandelsbanken inSweden,criticizedandabandonedthe budgetinthe 1970’s. He
statesinhiswork “Budget-anunnecessaryevil”,thatorganizationcoulddobetterwithoutbudgeting. First,
Wallanderclaimsthatthe budgetisbasedonthe principle “same weathertomorrow astoday”(Wallander,1999)
The budgetindicatesanongoingnormal andcontinuoustrend,thusthe budgethasnoeffectasa managementtool
for forecasting. Secondly,if somethingunexpectedoccursthe budgetwouldbe atno helpeither(Wallander,1995).
The budgetrather stopspeople fromtakingactions. AccordingtoWallander,budgetsare summariesbasedon
guessesandassumptionsaboutthe future andexcludeunpredictable events. Inbestcase scenariosbudgetsare
onlya waste of resourcesandin worstscenariostheyare dangerousbecause theygive deceitful informationabout
where firmsare heading.
The majorityof criticismof traditional budgetingmethodshasbeenpublishedby the proponentsbehindthe Beyond
Budgetingmovement,Hope &Fraser. Theirinitial criticismswereusedasa spearheadtocreate a better
managementtool.
Traditional methodsrelyonpastinformationwhichcanhave negative knockoneffects.Anexample
isthe incremental budgetingtool,wherethe previousyear’sbudgetis slightlyadjusted forthe new yearwithoutany
analysisintoareaswhichare over/underperforming.
The performance evaluationisgenerallycarriedoutatthe end of the budgetperiod;thiscan be toolate to remedy
deficiencies.Leadingonfromthis,the commonpractice isto carry outfixedpercentage cutswhenearlyresults
appearunacceptable (Hope &Fraser,2003).
Libby& Lindsay(2007) feel thatthe problemsare originatingfromhow budgetsare implementedandusedwithin
business,if usedcorrectlytheystill canbe a veryeffective tool.
Ekholm& Wallin(2010) agree withLibbyand Lindsay,andadd thatif properly usedtraditional budgetsare astrong
frameworktoplanand measure acompany’s operations.Therefore itcanbe suggestedthatmany of the
inadequaciesof traditional budgetscouldbe downtothe implementationandnotthe tool itself.
Despite the reasoningbehindthese limitations,Hope andFraser(1997) report that 99% of Europeancompaniesuse
formal budgetingprocedures,thisfigure islikelytoremainhigheventoday.Inaddition,asurveyof US organizations
by Libby& Lindsay (2007) revealedthatover50% of seniormanagersfeltbusinessescouldnotcope without budgets
and that theywere imperative tosuccess.Managersalsobelievedthatdespite the associatedtime andcosts,
budgetswere addingvalue toacompany.

31
Ekholm& Wallin (2010) feel the annual budgetisnotdeadyet,butit ispast itspeakand has lostusefulness and
become outdated.
The existingbudgetmodel cannotpossiblybe of anyuse forthe followingreasons:
 Budgetsdonot helpcompaniesfocusonthe performance driversof today’sorganizationse.g.innovation
rates,service levels,quality,andknowledge sharingetc.(these are clearlyshowninabalancedscorecard)
 Budgetshave beenturnedintofixedperformance contractsandhave ledtodysfunctional behaviorwithdire
circumstances - managersina studywere foundtobe inclinedtoeithertryandbeatthe systemorfelt
pressuredtoachieve targetsat any cost (the same behaviorthatgeneratedmanyof the recent“managed
earnings”scandals)
 Budgetstreatall employeesascosts;whereasateam’stalent,innovationandcommitmentare more
importantindeterminingperformance thanthe “personnelcosts”of the teamthe budgetprocessbuilds
silos,effectivelycompartmentalizingacompanyintosmall units.
Hope and Fraser(2003a) were the firstto pointoutthat the budgetprocesslimitsthe abilityof organizationsto
make full use of newmanagementphilosophiessuchaseconomicvalue added(EVA),BalancedScorecard,activity
basedmanagement(ABM),customerrelationshipmanagement(CRM) androllingforecasts
Hope and Fraser(2003b), the managementgurusbehindthe “Beyondbudgetingmovement”have statedthatnot
onlyisthe budgetprocessa time consuming,costlyexercise generatinglittle value,butalso,andmore importantly,
a major limitingfactoronhowyourorganizationcanperform.Theyhave manyexamplesof companies,following
the philosophiestheyhave expounded,whichhave brokenfree andachievedsuccesswell beyondtheir
expectations.Here are three quoteswhichchallengethe veryconceptof budgeting.
“So long as thebudgetdominatesbusinessplanning a self-motivated workforceisa fantasy,howevermany cutting-
edgetechniquesa company embraces”
“Modern companiesrejectcentralization,inflexibleplanning,and command and control.So why do they cling to a
processthatreinforcesthosethings?”
“The samecompaniesthatvowto respond quickly to marketshiftscling to budgeting – a processthat slowsthe
responseto marketdevelopmentsuntilit is too late.”

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2.5.2 Other benefitsofthrowing out the budgetprocess and its associatedannual performance trap
Many readerswill have wonderedwhythe introductionof soundnew managementtoolshasnotworkedintheir
organization.Hope andFraserhave foundthe culprit;the budgetprocess asexplainedinthe below drawntable:
Model How the budget undermines the model
Economic
Value added
(EVA)
The “silo based” budgeting approach is not compatible with a
process view of the organization which is required for EVA.
Benchmarking The extent of under performanceagainst best-in-class standards
loses its visibility as the shortterm budget (fixed performance
contract) dominates thought and action
Balance
Scorecard
(BSC)
Itis easy to turn the BSC with its financial and non-financial
measures into yet another fixed performancecontract with the
same dysfunctionalbehavior. The silo approach to budgets again
wins over the strategic and cross functionalfocus that a BSC needs
Activity based
management
(ABM)
The budget process does not focus on costdrivers or critical success
factors but instead forces management to sail a coursethat was set
many months earlier which may haveno relevance to the prevailing
conditions
Customer
relationship
management
(CRM)
The inside-out budget process is at odds with the outside-in CRM
strategies. Sales staffs aretoo frequently hell bent on meeting
internal goals rather than customer satisfaction and customer
profitability.
Table 1: How the budgetunderminesvariousbudgetingmodels
(Otley1999). However,amore recentsurveyof Finnishfirmsfound thatalthough25 percentare retainingtheir
traditional budgetingsystem,61percenta reactivelyupgradingtheirsystem, and14 percentare eitherabandoning
budgetsorat leastconsideringit(EkholmandWallin2000). We discusstwopractice-leddevelopmentsthat
illustrate proposalsto improve budgetingorto abandon it.
Althoughthe twodevelopmentsreachdifferentconclusions,bothoriginatedinthe same organization,the
ConsortiumforAdvancedManufacturing-International(CAM-I);one in the U.S.and the otherin Europe.The U.S.-
basedCAM-IActivity-BasedBudgeting(ABB)

33
groupadvocatesimprovingthe budgetingsystembymarryingamore complete, activitybased operational model
witha detailedfinancial model.
Its focusison improving budgeting’ssupport of operationalplanning.The European-basedCAM-IBeyond Budgeting
(BB) group takesa more radical viewandrecommendsatwo-stage approach.
The firststage addressesthe problemswithbudgetingwhentheyare usedforperformance evaluation.
It suggeststhattraditional budgetarycontrolsthatcombine planningandperformance evaluationleadtobothpoor
planninganddysfunctionalbehavior.
Therefore,the BB-grouprecommendseitherradicallychangingtraditional budget-basedperformance evaluationsor
completelyeliminatingthe budgetprocess.The secondstage of the BB-approachisto radicallydecentralizethe
organizationandempowerlower-level managersandemployees. Althoughthe ABB-grouphasmore of a planning
focusand the BB-groupmore of a performance evaluationfocus,theyshare acommonbeliefthattraditional
budgetingisfundamentally mismatchedtotoday’srapidlychanginganduncertainenvironments.
2.6 The Role of Budgetary Datain Performance Evaluation
It isimportantto recognize thatevenstandardaccounting reportswhichshow the actual andbudgetedcostsforan
organizational costcentre canbe usedinmanydifferent waysinperformance evaluation.Inastudyconductedin
one divisionof alarge Chicago-basedcompany,21three stylesof evaluationwhichmake distinctlydifferentusesof
the monthlyaccountingdatawere isolatedandoperationally defined:
2.6.1 Budget ConstrainedStyle.
Despite the manyproblemsin usingaccountingdataascomprehensive measuresof managerialperformance,the
evaluationisprimarilybased uponthe costcentre head'sabilitycontinuallytomeetthe budgetona short-term
basis.Thiscriterionof performance isstressedatthe expense of othervaluedcriteria.
2.6.2 A Profit ConsciousStyle.
The performance of the cost centre headisevaluatedonthe basisof hisabilityto increase the long-term
effectivenessof hisunitinrelation tothe purposesof the enterprise,one importantaspect
beinghisconcernwith the minimizationof long-runcosts. Forthispurpose,the accountingdata have tobe used
withsome care ina flexible manner,andwhere necessary, supplementedbyalternativesourcesof information.

34
2.6.3 A Non-accountingStyle.
Accountingdataplaya relatively unimportantpartinthe supervisor'sevaluationof his subordinates'performance.
The stylesof evaluationwere operationallydefinedonthe basisof costcentre headrankingsof the three most
importantcriteriaintheirevaluationoutof a listof eightpossible items;abudgetconstrainedorientationbeing
representedby'meetingthe budget'anda profitconscious
orientationby'concernwithcosts.
These phraseswere selectedonthe basisof observationsmade duringan exploratoryseries of interviews,whenit
was foundthattheywere usedbymembersof the companyto referto
distinctpatternsof evaluativebehaviorwhichwerein agreementwiththose describedabove.The research
instrumentswere pre-testedandattemptsweremade to collectevidence tofurtherestablishtheirconstruct
validity.
Empirical evidence indicatedthatboththe budgetconstrained andprofitconsciousstylesresultedinahigher
degree of involvementwithcoststhanthe non-accountingstyle.
Onlythe profitconsciousstyle,however,succeeded inattainingthisinvolvementwithoutincurringeither emotional
costs forthe costcentre headsor defensive behaviorwhichwasdysfunctional forthe enterprise.The budget
constrainedstyle resultedinabelief thatthe evaluationwasunjust,widespreadtensionandworryon the job,and
feelingsof distrustanddissatisfactionwiththe supervisor.
It is hardlysurprisingthatthese costcentre headswere foundtomanipulatethe accountingdataand
make decisionswhichresultedinlessinnovative behaviorand,attimes,highertotal processingcostsforthe
enterprise asawhole.Inaddition,the conflictandrivalrybetween fellow costcentre headsinsuchdepartments
impededthe co-operationwhichwassoessential forcontrollingtheirinter-dependentactivities.
In contrast,the profitconscious style,while seenasa verydemandingstyle,wasaccepted andrespected,and
resultedinsimilarlevelsof job-relatedtension,supervisorsatisfactionandpeersupportivenessand those prevailing
witha non-accountingevaluation.
The study clearlydemonstratedthatthe final effectiveness withwhichabudgetarysysteminfluencesthe overall
efficiencyof anenterprise,aswellasitsownmore limited purposes,isdependentnotonlyuponthe designand
technical characteristics,butalsouponthe precise manner inwhichthe dataare usedby line managers.

35
Accountingdatado not inand of themselvespose athreatto members of anenterprise,andtheirimperfections
neednotnecessarily be seenasunjustwhentheyare usedinperformance evaluation.
A manageris notfacedwitha simple choice betweenusingandnotusingthe data in evaluation.Instead, he can
reapmany of the benefitsof the systembystressing factorswhichitattemptstomeasure withoutthisresulting in
dysfunctional consequences.
To do so,however,consideration hastobe giventothe widerorganizational contextwithinwhichtheyare used.
While arigiduse of the data is difficulttoresist,passing down ahierarchyonce ithas beenestablishedatone level,
the studyshowedthatthe way inwhichthe data are used isassociatedwithmuchmore general differencesin
supervisorystyle.
Both the budgetconstrainedandprofit conscioussupervisors,unlike those usinganon-accounting
style,were seenastryingtocreate a structured job environmentwhichwasdemandinganddifficulttosatisfy.
The profitconscioussupervisors,however,werealsoseen asmaintainingawarmand friendlyatmospherewhich
was supportive andconduciveformutual trustandrespect.
Withoutthe moderatingeffectof thisconsiderate attitude towardsthe costcentre heads,the concernforthe
accountingdata wasseenas threateningandstressful,servingasa triggerfordefensive and oftendysfunctional
behavior.
The profitconsciousstyle appearstobe one aspectof a general problem-solvingapproachto management,as
distinctfroman approachwhichattemptsto impose afalse measure of cognitivesimplicityontoacomplex and
interdependentseriesof activities.
The evaluationof performance isof primaryimportance initself withthe budgetconstrained style,influencingall
aspectsof the supervisor'sandthe cost centre head's behavior.Inthiscontext,evaluationisnot viewedas an
ongoingpartof the managerial process, interrelatedwithotherimportantaspectsof the job,and justone part of
the processof influence.Rather,itisseen asa distinctanddominantactivity,andthe primarysource of influence
and control,overshadowingothervital elements of the process.The budgetbecomesnotanaidto management but
a constrainton it.
While cautionneedstobe exercisedin generalizingthe findings,thisstudyof the role anduse of important aspects
of a formal informationandcontrol systemhighlights the crucial inter-dependencyof specialistmanagement
functionswhenthese are viewedaspartof a widersocial system.The veryeffectivenessof the budgetarysystem

36
was bothdependentupon,aswell asreinforcing,the characteristicsof the widerorganizationalclimatewithin
whichitsuse occurred.
2.7 Overview of Activity-BasedBudgeting
2.7.1 The Role of BudgetingIn Planningand Control
Budgetingplaysacrucial role in planningandcontrol. Plansidentifyobjectivesand the actionsneededtoachieve
them.Budgetsare the quantitative expressionsof these plans,statedineitherphysical orfinancial termsorboth.
Whenusedfor planningabudgetisa methodfor translatingthe goalsandstrategiesof an organizationinto
operational terms.Budgetscanalsobe usedincontrol. Control isthe processof settingstandards,receiving
feedbackonactual performance,andtakingcorrective actionwheneveractual performance deviatessignificantly
fromplannedperformance.Thus,budgetscanbe usedto compare actual outcomeswithplannedoutcomes,and
they can steeroperationsbackoncourse,if necessary.The
illustrationof the relationshipof budgetstoplanning, operating,andcontrol showedasbelow.Budgetsevolve from
the long-runobjectivesof the firm;theyformthe basisforoperations.Actual resultsare comparedwith budgeted
amountsthroughcontrol.Thiscomparison providesfeedbacksbothforoperationsandforfuture budgets(Hansen
and Mowen,2003).
Figure7: Purposesof budgeting

37
2.7.2 Activity-BasedBudgeting
Horngren,SundemandStratton (2007 sayin essence that:
Mostbusinessorganizationsusebudgetto focusattention on company operation and finances,notjustlimit
to spending.Budgetshighlight potentialproblemsand advantagesearly,allowing managersto takestepsto
avoid theseproblemsor usethe advantageswisely.A budgetisa tool thathelpsmanagersboth their
planning and controlfunctions.Budgetshelp managersplan forthefuture.However,managersalso use
themto evaluatewhathappened in thepast.Study afterstudy hasshown thatthebudgetto be oneof the
mostwidely used and highestrate cost-managementtoolsforcostreduction and control.Advocatesof
budgeting go so faras to claim thatthe processof budgeting forcesa managerto becomea better
administratorand putsplanning in theforefrontof themanager’smind.Actually,many seemingly healthy
businesseshavedied becausemanagersfailed to draw up,monitor,and adjustbudgetsto changing
conditions.Themajorbenefitsof budgeting can summary asfollow:
(1) budgeting compelsmanagersto thinkahead by formalizing theirresponsibilitiesforplanning,
(2) budgeting providesexpectationsthatarethebest frameworkforjudging subsequentperformance,and
(3) budgeting aidsmanagersin coordinating theirefforts,so thattheplan of an organization’ssubmitsmeet
the objectiveof the organization asa whole”.
However,intoday’sbusinessenvironment,a numberof organizationsandpeople have beenverycritical of the
traditional budgetingprocess.
These criticsargue that the traditional budgetingprocessdoes the following:
(1) reflectatop-downapproachto organizingthatisinconsistentwith the needtobe flexible and adapttochanging
organization circumstance,
(2) focusesoncontrolsratherthan focusing onhelpingthe organizationachieve itsstrategicobjectives,
and
(3) causesresource allocationstobe drivenbypolitics ratherthanstrategy.Thatis, political powerinthe

38
organizationdrivesresourceallocationsratherthanthe strategicneedsthatdrive traditional budgeting(Kaplan
1998)
A recentapproachto budgetisactivity-basedbudgetingthatisbasedonABC. Activity-basedbudgetinguses
knowledge aboutthe relationshipsbetweenthe quantityof productionunitsandthe activitiesrequiredtoproduce
those unitstodevelopdetailedestimateof activityrequirements underlyingthe proposedproductionplan.
2.7.3 The two main benefits of ABB are:
(1) It identifiessituationswhen productionplanrequire newcapacity –both physical capacityandcapacityin people
resources – to delivermuch of supportandservice activitiesinorganizations.
(2) It providesamore accurate wayto projectfuture costs (Kaplan:2008)
Hansenand Mowen(2003) presented thatthe ABBbeginswithoutputandthendeterminesthe resources
necessarytocreate that output.Ideally,the organizationtranslatesitsvisionintoastrategywith definable
objectivesinordertocreate value.
Ways of creatingvalue include growingmarketshare,improving salesrates,reducingexpenses,increasingprofit
margins, increasingproductivity,andreducingthe costof capital.
We can lookat a budgetfromthree perspectives:a traditional functional-basedapproach,aflexible budgeting
approach,and an activity-basedapproach.
Traditional budgetingreliesonthe use of functional-basedlineitems, suchassalaries,supplies,depreciationon
equipment,and soon.The flexiblebudgetusesknowledgeof costbehavior
to splitthe functional-basedlineitemsintofixedand variable components.
The ABB worksbackward from activitiesandtheirdriverstothe underlyingcosts.
Traditional budgetingfocusesonthe result,notthe processorroot cause. ABB,by focusingonthe process, give
managersguidance inthe wayto achieve the desired results.Whenactivity-basedbudgetingisused,the root causes
can be identified,andthisknowledgecanbe usedto effectprocessandcost efficiencies(HansenandMowen, 2003).

39
A comparisonof ABC and ABB is shownin figure as follow:
Figure 8: ABC and ABBcompared
Source: Adaptedfrom Horngren, Sundemand Stratton, (2007)
Activity-basedcosting(ABC) is definedasamethodologythatmeasuresthe cost andperformance of activities,
resources,andcost objects.Specifically, resourcesare assignedtoactivities,thenactivitiesare assignedtocost
objectsbasedontheiruse.ABCrecognizesthe causal relationshipsof costdriversto
activities(Instituteof ManagementAccountants,1998).

40
Figure 9: Using ABM for operational improvements andstrategic decisions
2.7.4 Using ABM for operational improvements andstrategic decisions
Operational ABM – worksto enhance efficiency,lowercostsandasset utilization.Itcanincrease the capacityof
resourcesbyreducingmachine downtime,improvingoreliminatingentirelyfaultyactivitiesandprocessesand
increasingthe efficiencyof the organization’s resources.The benefitsfrom
operational ABMcan be measuredbyreducedcosts,higherrevenuesthrough betterresource utilizationandcost
avoidance.
Strategic ABM – exploresvariouswaysacompanycan create andsustaina competitive advantageinthe
marketplace. ABMattemptsto alterthe demandfor activitiestoincrease profitability,encompassesdecisions
aboutproduct design anddevelopmentwhere the biggestopportunityforcostreductionexists, improves

41
relationshipswithsuppliersandcustomers. Some of the specificusesof ABMin organizationstodayinclude
attribute analysis,strategicdecisionmaking,benchmarking,operationsanalysis, profitability/pricinganalysis,and
processimprovement.ABC/ABMsystemscan
use (IMA,1998) manydifferentattributesor“datatags” for a specificcost. Data attributesallow acompanyto
performanalysisonmanydifferentdimensionsof a managementproblemusingthe same basicstore of data.
Organizationsthatare designingandimplementingABMwill findthere are five basicinformationoutputs:
• relevantinformationaboutthe costof activitiesandbusinessprocesses;
• the cost of non-value-addedactivities –inorderto identifyactivitiesthatdonotcontribute tocustomer
value or the organization’sneedand make improvementefforts;
• activity-basedperformance measures –to provide scorecards,toreporthow well improvementeffortsare
working;
• accurate product/service cost(costobjects) information –thisisvital forselectingthe segmentedmarkets
where anorganizationcompetes;
• cost drivers – inorder toidentifyfactorsthatcan cause changesin the cost of an activity.

42
Figure10: Outputs of the ABM model
The shiftfromABC (forproduct profitabilityassessment) toABM(formore general managerial control anddecision
support) hasbeensupplementedbythe broadeningof ABC/Mapplicationtodifferenttypesof business,todifferent
functional specializationswithinbusinessandtothe complementaritiesof ABC/M to othernew high-profile
managementandaccountingtechniques(Bjornenak& Falconer,2002: 504).
Together,ABCandABM methodologiesprovidethe toolsandthe knowledge base formakinginformeddecisions -
decisionsthatrelate tothe pricing, management,andimprovementof productsandservices.Theyare utilizedto
gainfullerunderstandingof the real costdynamicsandcost structuresinvolved inbusinessoperations.
ABMtogetherwithABCprinciplescanenable managers tobetterunderstand(a) bothproductandcustomer
profitability,(b) the costof businessprocesses,and(c) how to improve them.
ABC andABM are a continuumof value.ABMisthe applicationof ABCdatato manage product portfoliosand
businessprocessesbetter.
ABB processisa reverse processof ABCapproach. The above figure highlightsthe mainconceptsanddifferences
betweenABCallocationof resource coststoactivitiesand products,andABBdoes.ABB beginswiththe forecasted
demandforgoods(salesbudget).Itfocusesonestimating the demandforeachactivity’soutputasmeasure byits
cost driver.Thenusingthe rate at whichactivitiesconsume resourcestoestimate orbudgetthe resource needed.
ABB emphasisonactivitiesandtheirconsumptionof resources, some managersbelieve thatitismore useful for
controllingwaste andimprovingefficiency.

43
ActivityBasedBudgetinghasitsideological basisof the workonActivityBasedCostingasRobinCooperandRobert
S. Kaplanstarteddevelopinginthe mid-1980s.But incontrast to ActivityBasedCosting, thatviaresource drivers
traces resourcestoactivitiesandhence viaactivitycostdriverstracesthe consumptionof activitiestoproducts,
customersandothers,and thenthe processisreversedinActivityBasedBudgeting.Ifigure 4.9a model of Acti vity
BasedBudgetingisshown.
Figure 11: A model ofActivity based budgeting;
Source: Adaptedfrom Kaplan & Cooper (1998) ,pp116

44
2.7.5 A model of Activity basedbudgeting;
Kaplan& Cooper(1998) opine thatActivityBasedBudgetingconsistsof the following5sequences:
1. Estimate nextperiod´sexpectedproductionandsalesvolumesbythe individual productsandcustomers
2. Forecast the demandfororganizational activities
3. Calculate the resource demands toperformthe organizationalactivities
4. Determine the actual resource supplytomeetthe demands
5. Determine the activitycapacity
The startingpointfor budgetingisasalesforecastof salesvolume andmix of productsto customersperperiod.This
formsthe basisfor a calculationof production,stocks,purchasesof materialsandcapacityrequirementsand
capacityusage equivalenttohowitwouldbe done withintraditionalbudgeting.Butthe specificityof ActivityBased
Budgetingisthatthe sales forecastat the same time isusedto estimate the needforindirectandsupportactivities.
Thiscan be activitiesinthe formof,forexample ordering,receivingandhandlingmaterials,schedulingandsetting
up productionruns,andpack and shiporders. Butit can, inprinciple be all activitiesthatisshowninthe activity
catalog of the company.The linkbetweenproductsalesforecastandthe needforactivitieswill be done through
selectionof appropriate activity-costdriversandknowledge of how manyactivity-costdriverunitsagivenquantity
of productsor customersdemand.
The nextstepinthis processisto translate the demandforactivitiestoaresource demand.Thismeansthatitmust
be determinedhowmanyunitsof activityaresource unitcanperform.Activitiescaninprinciple be estimatedin
numberof activityunits(transactions) ortime (duration).The choice betweenthe 2typesof driversisguidedbythe
homogeneityinthe activities.Byhomogeneousactivities,characterizedbyavery uniformtime peractivity,the
numberof unitsof activityrelativelyeasilyandunambiguouslyistranslatedintoause onresourcesintime.
Alternatively,activitiescanbe measuredintime.Totranslate the numberof expectedactivitiesintoaneedfor
resourcesthe companymustdefine the capacityperresource unit.There are fourcapacityconceptsthat are
importantto be aware of:
1. Theoretical capacity
2. Practical capacity
3. Normal capacity utilization
4. Used capacity

45
Theoretical capacity expressedthe maximumcapacityavailableforagivenresource.Anemployee,hiredfor40
hoursper weekandwhoispaidfor 52 weeksayear has a maximumtheoretical capacityof 2080 hours.From this
processeslike vacation,sickleave,breaksandeducationis subtractedsothe real time atdisposal totask performing
for the companymightonlybe 1600 hours.Thisis the practicalcapacity that expressesthe time anemployeehasat
disposal fordoingthe jobshe or she isintendedtodoin the company. Finallyworkplanningormissingtaskscan
meanthat youmightonlybe able to use the employee 80% of the time at disposal.The real used capacity isthus
only1280 hours.In some instancesthere isaneedfordefiningthe normalcapacity utilization whichisthe average
level of utilizationof the capacityovera periodof time,typically2-3years.
Whencapacity iscalculated,the startingpointwouldbe the practical capacitysince itexpressesthe reel capacity
available fortaskperforminginthe company.But the difference betweenthe theoretical capacityandthe practical
capacitydependsona numberof conditionsthatisdeterminedandagreeduponinthe individual companysuchas
lengthof breaks,extentof trainingetc.Itisthusa managementissuetoagree uponthe expectationsbetweenthe
companyand the employeesregardingwhichconditionsthere shouldbe betweentheoretical andpractical capacity.
Similarly,itisimportanttoplanworkinsuch a way thatthe practical capacityis usedsince a large difference
betweenpractical andusedcapacityindicatesinefficientresource utilization.Atthe same time,the above means
that the chosenlevel of service andqualityisdefiningforhow manyresourcesisneededtoperformagivennumber
of tasks.
Accordingto Hansenand Mowen (2007), in orderto buildanABB fourstepsare needed.
Step1: The outputof the departmentmustbe determined;
Step2: The activitiesneededtodeliverthe output,along withtheirrelateddrivers,mustbe identified;
Step3: The demandforeach activitymustbe estimated;
Step4: The cost of resourcesrequiredtoproduce the relevantactivitiesmustbe determined.
It iscriticallyimportanttosee thatABB is basedon expectedoutput.Traditional budgetoftenplansforward from
lastyears’experience,whileABBplansbackward fromnextyear’soutput.The differencesbetweenthe two
approachesare more thansemantic.Inaddition,the ABB approach,usingresourcesandactivitiestocreate output,

46
givesthe managersmuchmore informationaswell as abilitytoconsidereliminatingnon-value-addedactivities.
(HansenandMowen,2003)
Figure 12: Overviewof the ABB-Approach
Source:Adaptedfrom Hansen, Otley, Vander Stede, 2003, pp100

47
2.80 Alternativestotraditional budgeting
2.8.1 Rolling budget
In the ACCA studytextof AdvancedPerformance management(2012:30), the Get throughguide,itdefinesrolling
budgetas a budgetthatneedsto be continuouslyupdatedbydeductingthe earliestperiodandtakinginto
considerationthe future period. Thisapproachto budgetinghelpstoeliminate the adverse impactof environmental
uncertaintiesonsettinggoalsbyupdatingthe budgetin quicksuccession. Thisbudgetencouragesaforward-looking
attitude.
Strengths
1. As rollingbudgetsare preparedonthe basisof recentexperience bytakingintoconsiderationthe current
period,theyare updatedwiththe currentchanges. Rollingbudgetsare continuouslyupdatedwithcurrent
information. Thishelpstominimizethe operational variances.
2. Rollingbudgetsare the mostsuitable formof budgetfororganizationsworkinginanuncertainenvironment,
where future costsand/oractivitiescannotbe foreseenreliably.
3. A rollingbudgetmakesthe budgetingprocessresponsivetoplansinfluencedbychangesinstrategyandthe
market.
Weaknesses
1. A rollingbudgetincreasesbudgetaryworkandaccordinglymayface criticismonthe groundsthat exceptin
a veryuncertainenvironment,itisnotuseful toupdate the budgetsofrequently.
2. There isthe possibilitythatmanagerswillassignlessimportance toit.

48
Figure 13: Summary of rollingbudget
Source:Adapted from ACCAstudy text of AdvancedPerformance management (P5) 2012:31
2.8.2 Activity-basedbudget (ABB):
In the ACCA studytextof AdvancedPerformance management(2012:31), the Get throughguide,itdefinesactivity-
basedbudgetingasanapproach to budgetinginwhich,insteadof evaluatingthe costelements,activitiescausing
costs are evaluatedinordertoascertainwhethertheyare essentialforthe budgetedproductionandsalesvolume.
The endeavorof an activity-basedbudgetistoensure the supplyof onlythose resourcesthatare neededtoperform
activitiesrequiredtomeetthe budgetedproductionandsales. Like all otherapproachestobudgeting,itisalsoa
feedbackactivity.
Whereasactivity-basedcostingassignsresourcescoststoactivitiesandthenusesactivitycostdrivers toassign
activitycoststo cost objects(suchas products,servicesorcustomers),anactivity-basedbudgetfollowsthe reverse
process. Costobjectsare the startingpoint. Theirbudgetedoutputdeterminesthe necessaryactivitieswhichare
thenusedto estimate the resourcesthatare requiredforthe budgetperiod.
Strengths
An activity-basedbudgetisone of the mostuseful formsof budgetasit identifiesthe cause andeffectrelationship
betweenthe activityandthe costas well asbetweenthe activityandthe product.

49
1. An activity-basedbudgetcanprovide more detailedinformationthatcanimprove decision-making
comparedto a budgetbasedsolelyonoutput-basedcostdrivers.
Weaknesses
1. ABB are onlysuitable fororganizationswhere the activity-basedcostingsystem(ABCsystem) hasbeen
adopted. Thisisbecause,insuchorganizations,activitycentershave beenidentified. The ABCsystem
calculatesthe costsof individual activitiesandassignsthe activitycoststoproductsor services(i.e.the cost
objects) onthe basisof the activitiesneededtoproduce aproduct or a service. Without thisinformation,it
isimpossible toevaluate the activities. Therefore ABBcannotbe usedinan organizationwhere the ABC
systemhasnot beenadopted.
2. An ABBis time-consuminganditrequiresalotof efforttoimplementanABBin an organization.
Accordingly,large organizationswhichhave multiple costdriverscanonlyaffordtoprepare anactivity-
basedbudget.
Figure 14: Summary of Activity-basedbudgeting
Source: Adaptedfrom ACCA study text ofAdvanced Performance management(P5) 2012:32

50
Zero-basedbudget (ZBB):
Beginnings:
Figure 15: A briefhistoryof Zero-basedbudgeting
2.8.3 ZBB BEGINNINGS
Althoughzero-basebudgeting(ZBB) became popular inthe 1970s, the concepthas beenaroundmuchlonger. As
earlyas 1924 Britishbudget authorityE.HiltonYoung advocatedcomplete justificationof everyitem requested ina
budget(Wildavsky1975).

51
In 1962 the U.S. Department of Agriculture adoptedaground-upsystemof budgeting whichisconsideredtobe the
firstformal use of ZBB in the U.S. government.
However,the "Fatherof ZBB" (Crowe 1982) is withoutquestionPeterPyhrr,whocreated
and developedaZBBsystemforTexasInstruments aspart of hisresponsibilitiesascontrol administratorin the
1960s. The ideabeganin1962 when TexasInstruments startedusinganobjectives-strategies-tactics(OST) system
for evaluatingresearchanddevelopmentprojects (Chen1980).
Thisprocessfinallyevolvedintothe current ZBBconcept,whichwaspopularizedbyPyhrrin1970 in
an article inthe Harvard BusinessReview. JimmyCarter,thenGovernorof Georgia,readhisarticle,
was impressedwithit,andinvitedPyhrrtojoinhim inadaptingZBBfor Georgia's1972/1973 budget.Carter was so
enthusiasticaboutthe systemthat,whenhe became President,he orderedall federal agenciestoimplementa ZBB
systemby1979.
The concept of ZBB soon spread throughoutboththe publicandprivate sectorswithmixed
resultsandwas the subjectof manyarticlesinthe 1970s. AlthoughRonaldReagan droppedZBBduringhistenure as
President,andmuchof the enthusiasmhasnow disappeared (Koenig1985), a critical lookat how ZBB works, its
advantages,andpossible benefits,mayprovide some insightasto how thissystemmightbe adoptedoradapted by
organizationstoday.
2.8.3.1 WHATZBB DOES
ZBB is an operating,planning,andbudgetingprocess thatrequireseachmanagertojustifyhisentire budgetrequest
indetail.The burdenof proof shiftstoeach manager whomustjustifywhyshe shouldspendanymoneyatall (Pyhrr
1977).
It isdesignedtorequire the participationof managersatall levelsbecausetheyare indailycontact
withthe servicesof the organizationandare the experts inthe activitiesintheirdepartments.ZBBprovidesa
consistentframeworkwithinwhichall managersanalyzeall of theiroperationsintermsof objectives,alternatives,
performance measurements,andcost/benefits(Chen1980).
Theoretically,eachprogrammustbe analyzed,presented, andapprovedatthe beginningof eachbudgetcycle with
each organizational unitstartingfromabase of zero,hence the name (Koenig1985).
In practice,mostmanagersassume thatbasic functionscurrentlyinpositionare important andneedtobe
continued.

52
2.8.3.2 ZBB BASICS
Althoughopinionvariesonhowmanybasicstepsare necessarytoimplementZBB,the consensusshowsthree:
• identificationof organizational decisionunits,
• constructionof decisionpackages,and
• rankingof decisionpackagesandallocationof resources

53
Figure16: Decisionpackage form

54
2.8.3.3 Identificationof Organizational DecisionUnits
ZBB beginswiththe identificationof the organizational decisionunits,whichprepare the firstpartof the budget
(Hammond1980).
These unitsstartat the lowestlevel forwhichbudgetscanbe preparedandmaybe definedby
cost center,function,programoractivities,ororganizational unit(Taylor1977).
In libraries,decisionunitsmay fall alongdepartmentlines,suchasreference,technical services,children's,etc.Each
unit,whichmayvary insize, musthave an identifiable managerwiththe authorityto establishprioritiesandprepare
budgets.Italsomust comprise agroup of activitieswhichcanbe meaningfullyanalyzed andinfluencedby
managerial decisions.
In developingdecisionunitsitisnecessarytodetermine if the unitisessentialtothe organizationandif its activities
and operationsare inaccord withthe organization's goalsandobjectives.If itisnot,thenthismustbe remedied
before proceeding.Once these unitsare determined, itisnotnecessarytoredothisstepfor eachbudget unless
there are changesmade in the unit.
2.8.3.4 Constructionof DecisionPackages
The keyto the successof ZBB is the preparationof meaningful decisionpackages. A decisionpackage isabrief
justificationandrequestdocumentthatincludesthe critical informationnecessaryformanagerstomake judgments
on programdirectionandresource requirements (Sarant1978).
These packagesare createdat the departmentlevel andinvolvedescribingandanalyzingthe activities
of thatunit.The packagesshouldinclude different waysof performingthe same function,alternative methods that
have beenidentified,andthe reasonforthe final choice.
They shouldalsoindicate differentlevelsof effortnecessary toperformthe function,includingminimum,current,
and incremental levelsof fundingandperformance.The minimumlevel isthatfundingorperformance levelbelow
whichitis not feasible tocontinue aprogrambecause it and performance level of "proposed"budgetactivitiesat the
currentfundinglevel.
Andthe incremental levels are the proposedactivitiespossible withadditional funding.

55
Each decisionunitisgivendecisionpackage formson whichtosubmittheirreports.These formsmaybe adapted to
the individual organization,butingeneral shouldinclude the following:
• program/activityname,
• department,
• statementof purpose (goalsandobjectives,whatisto be done),
• descriptionof activity(clearlydefinesthe activitiesand procedures),
• benefits(whatistobe gainedif thispackage isapproved),
• alternatives(otheroptionsavailabletoachieve the same ornearlythe same results),
• consequencesof notapprovingthe package (impacton the departmentandthe organization),
• costsand resources(whatisfinanciallynecessarytoimplement the package).
Figure 17: Formulation ofdecisionpackages
2.8.3.5 Ranking of DecisionPackages and Allocationof Resources
Afterthe decisionpackageshave beenpreparedfor eachdepartment,the nextstepinZBBisto assigna priority rank
to each package inorderof decreasingbenefitor importance tothe organization.Thisisa processunique toZBB.
Prime considerationshouldbe giventothe goals of the organization,whichare the determiningfactorsto use when
rankingthe packages.The rankingprocessshould startwiththe basic decision-unitmanagerwhere the decision
packagesare developed.Thisenablesthe manager toevaluate the relative significanceof hisfunctionsand
activities.Thesepackagesare thensubmittedtothe next higherlevel of managementthatconsolidatesthesewith
otherdecisionunits.The combinationof all decisionunit

56
packagesisthenrerankedandsubmittedtothe nexthigher level of management.
Thisprocedure of combiningand rerankingisrepeatedonupthe hierarchyof the organization
until ultimatelythere isone consolidatedranking forthe entire organization.Atthe toplevel fundingdetermines
whichpackagesare approvedandwhichare not. All packagesare listedaccordingtotheirrankinganda cutoff line
basedon the budgetisimposed,all packagesabove the line are funded,all packagesbelowitare dropped.
Rankingat the top level may be done byone manager, twomanagers,or a group,dependingonthe organization's
size andstructure.There isusuallya minimumof confusion anda maximumof accountabilitywhenone person isin
charge (Pinola1984) butlargerinstitutionswithgreater
volume mayneedmore thanone person.
The four mostcommonapproachesto rankingdecision packagesare:
• the single standardapproach,whichisthe simplestapproach andevaluatesall packagesonthe basisof one
criterion,e.g.,absolutedollarsavings;
• the votingapproach,whichisoftenemployedby committees;
• the majorcategoriesapproach,where decisionpackages are slottedandrankedaccordingtoa predeterminedlist
of majorcategories;
• the multiple standardsapproach,where importantquestions mustbe addressed:Isthe programlegallyrequired?
Can we affordnot to act?
In the ACCA studytextof AdvancedPerformance management(2012:32), the Get throughguide,itdefineszero-
basedbudgetingasa methodwhichneedseachcostelementtobe specificallyjustified,asthoughthe activitiesto
whichthe budgetrelateswere beingundertakenforthe firsttime. Withoutapproval,the budgetallowance iszero.
Unlike aconventional budgetarysystem, where the budgetispreparedbyaddingtoor deductingfromthe budgetof
the precedingperiod,azero-basedbudgetisanelaborate practice inwhichmanagersjustifyactivitiesfromscratch,
as theywere beinglaunchedforthe firsttime.
ZBB is a cost-benefitapproachtobudgetinginwhicheachcostelementshouldbe evaluatedtobe includedinthe
budget. Each yearwhenthe budgetisprepared,all the costelementshave tobe evaluatedasif the budgetwere
beingundertakenforthe firsttime andwill be authorizedonlyif the costelementsare justified. The justificationof
any cost shouldtake intoaccounthowthe expenditurehelpsthe organizationtomeetitsobjectivesi.e.how it
benefitsthe organization.

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ZBB takesaway the impliedrightof existingactivitiestocontinue toreceiveresources,unlessitcanbe shownthat
thisisthe bestuse of those resources.
Strengths
1. As a zero-base budgetaimstocurtail unnecessarycosts,itissuitableforbothprofit-seekingaswell asnot-
for-profitorganizationstoadoptthiskindof budget.
2. A ZBB isbestsuitedtothe service industriesandtonot-for-profitorganizationswhere,foreachactivity,
alternative coursesof actionare possible. Insuchorganizations,ZBBhelpsindecidingthe mostappropriate
wayof performingthe activity.
3. ZBB can also be successfullyappliedtodiscretionarycostsandsupportactivities. Itmaybe notedthat
discretionarycostsare the fixedcosts(usually) thatarise fromperiodicbudgetapproximationdecisions
takenaccordingto organizational policy.
4. For an activitywhere there isnoclearrelationshipbetweenthe inputandoutput,zero-basebudgetscanbe
used. Where there isa clearinput-outputrelationship,itisnotpossible toreduce the requirementof the
input.
5. Zero-base budgetingcreatesaquestioningattitude withinthe organizationwhichhelpstocurtail the
activitieswhichdonotprovide the bestvalue formoney.
6. ZBB focusesattentiononthe featuresof the products/servicesinrelationtovalue formoney.
Weaknesses
1. Zero-base budgetingistime-consumingand therefore expensivetoundertake.
2. Managers whose areasof responsibilityare subjectedtoZBBmay feel threatenedbyit. If senior
managementisaware of the potentiallythreateningnature of thisformof budgeting,care canbe taken
to applyZBB withsensitivity. However,inthe questforvalue formoney,the applicationof ZBBcan
resultinsome toughdecisionsbeingmade.

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Source: Adapted from ACCAstudy -AdvancedPerformance management (P5)( 2012:33)
Figure 18: Summary of ZBB

59
2.8.3.6 APPLICABILITY
Since ZBB isa flexiblebudgetingtool,itcanbe used bymostlibrariesregardlessof size,nature,orstructure. But
accordingto Austin(1977), ZBB is nota technique thatcanbe universallyapplied.He believesZBBmaynot be
effectivewhere managementisnotinterestedinthe process,wherethe organizationisstable andwell under
control,or where the organizationistoosmall insize to
warrant adoptingZBB.
Librariesthatmay wantto consideradoptingaZBB approach include organizationswitheconomicpressures, where
expendituresexceedincome,orwhere there isan unusual amountof activity.A librarythatlacksthe ability toset
prioritiesinitslevelsof service orwhose costsdo not match the statedobjectivesof the organizationmightwell
benefitfromimplementingaZBBapproach, as would
any otherorganizationinwhichtraditionalbudgeting processesare ineffectual (Stonich1977).
Since mostlibrariesoperate asasubordinate unitof a largerorganization,the choice of whatbudgetingstructure is
to be usedisrarelyleftto the discretionof the director.
If ZBB isnot adoptedbythe higherorganization,the library staff mightwell be facedwithanunacceptablyhigh level
of paperworkinpreparingbudgetsintwo differentformats(Crowe 1982).Conversely,if the higherorganization has
implementedZBB,itisprobablyinthe best
interestof the librarytocooperate (Koenig1985).Often itis notthe librarythat decideswhichbudgetingprocedure
to use;the parentingorganizationmaybe the crucial determinant.
If,however,alibraryorganizationhasdecidedtouse the ZBBapproach,Chen(1980) has listednine majorfactors
necessaryforthe successful implementationof aZBB systeminlibraries.
Briefly,
1. Be sure you have a thoroughknowledgeof the organization, itsgoals,mission,objectives,users,programs, costs,
strengths,weaknesses,staff,andsupportstructure.
2. Maintainhorizontal andvertical communicationamong managersandstaff.Thisiscritical inanysystembut
especiallyduringthe ZBBprocesswhere decisionpackages maytendtooverlapandcause confusion.
3. Link currentorganizational goalsandobjectivestolong range planning.The identificationof goalsandobjectives
alongwithan analysisof currentprogramsprovides abasisfor long-termplanning.
4. Make sure there isa definiteneedtoimplementZBB.
Unlessthere isa needtoadopt the ZBB systemand unlessthisneedissharedbyall levelsof management, an
organizationshouldnot attempttoundertake any unnecessarychanges.

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5. Establishsystematicandwell-developedproceduresdesigned tomeetthe specificneedsof alibrary.These
proceduresshouldbe clearlydefined,andif possible, listedinamanual available toall.
6. Implementextensivetrainingopportunitiesforall managers.
Thistrainingcan be providedthroughcoursesor workshopsandshouldbe supplementedwitha trainingmanual.
7. Obtainstrong managementinvolvementandcommitment. While strongupper-levelmanagementisnecessary,
lower-level managementinvolvementisequally importantforitisat this level thatthe crucial decision packagesare
prepared.
8. Allocate adequate time.Thisisabsolutelynecessaryfor planning,implementing,analyzing,andorganizing.
9. Considerthe humanfactor.It is importanttomake library managerscomfortable withthe processandexcited
aboutits potentials.
Figure 19: Management’sinvolvementinthe zero-base budgeting

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2.8.3.7 WHATCAN WE EXPECT OF ZBB?
Clearly there are manybenefitstousingaZBB system, butthe entire package mustbe evaluatedintermsof a
library'sneeds.ItappearsthatZBB is notas popularasit once was.
However,certainfeaturesdoremainappealing. Theyare:linkingobjectivesand resourcesandlistingalternative
choices,toname two.
For those whonowuse the common line-itemformat, the change will require areasonableperiodof time for data
collectionandforstaff to learnthe stepsinthe process.
However,the result — programsfundedonaprioritybasis as opposedtoprogramssupportedonthe basisof
inflationary supplementsalone— isworththe effort.Atleastit putsan endto continuedsupportforprogramsthat
are merelyhistorical accidents.

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2.8.4 Beyondbudgeting
Hope and Fraser(2001) in theirQuestionsandAnswersinterview were contendedindefiningBeyondbudgetingas
follows;
Figure 20: The Advantages of BeyondBudgeting
Source: Adapted from ACCA study text (2012:39), A get through guide.

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Beyond Budgetingpromotesthe mostideal characteristicsof abudgetingsystem; flexibility,coordinationand
responsiveness(Pilkington&Crowther,2007).
It isnot justanothersystemof tools;itrequiresacomplete overhaul of the organizations culture anda
shiftinthe managementstyle (Beckeretal,2009).
Hansen(2011) statesthiscan be performedintwostages;move towardperformance evaluationrelative to
competition andthenimplementadecentralizedstructure.
Hope & Fraser(2003) believethe limitationsof traditionalbudgetarysystemsrequire businessestoabandon
budgetingaltogetherandinsteadfocusonfinancial and non-financial measures.The processshould looktoexternal
benchmarksandcompetitorsratherthaninternallysettargets.
The restrictive nature of budgetsisremovedandthiscanenhance the potential of a firmwhilstempowering
employeestomake betterdecisions.
Player(2003) describes BeyondBudgetingasextremeapproachbutwithvastbenefitstobe realized.A key problem
area iswithrewardingmanagersusingtraditionalsystems.A BeyondBudgeting rewardsystemisfarmore
appropriate asit isrelative toperformance measures,often derivedfromcompetitorsandbenchmarks(Hope&
Fraser,2003).
Daum & Hope (2003) argue that BeyondBudgetingisamore adaptive approachto management,withmore
frequentperformance reviews.A secondfeature isthat centralizedandhierarchical structuresare convertedtoa
decentralizedmanagementstyle. Thisempowermentpushesauthorityanddecisionmakingtolowerlevelsof the
business. The effectcanbe foundinincreasedproductivityandmotivation. Managershave embeddedbudgetsinto
theirculture soit islikelytheywill
struggle tomanage withoutthem.
Hope andFraser (2001) believe thatthe volatile nature of the environmentmeanbudgetsandplansare redundant.
Budgetstry to remove surprisesfrombusiness.Instead,managersshouldembrace themandlooktothemas
opportunitiesforimprovement.Theycontinuebysayingthatinorderto take full advantage of the opportunities
lowerlevel staff needthe authoritytomake strategic decisions.Furthermore the removal of budgetscreatesextra
time formanagersspendon problemsolvingandaddingvalue tothe business,asthe time takentoprepare budgets
isa particulardisadvantage (Ostergren&Stensaker,2011).

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The BeyondBudgetingmodel isbecomingincreasinglypopularandmany companiesare now followingitsprinciples.
Hope & Fraser(1997) discoveredthatthe ScandinavianbankSvenskaHandelsbankenabolishedall formsof
traditional budgeting in1979. Since thenithas grown intothe largestbankinScandinaviaandone of Europe’s most
efficientbanks.TheirCEOreportedthata cultural change frombudgetsandtargets to improvementhas enabled
costs to be drivendown.
Daum (2002) statesthat SvenskaHandelsbanken utilizedadecentralized structure toenableeachbranchto runas
an independentprofitcentre.Thisisanexample of the potential thatBeyondBudgetingcan unlock
Johnson (2005), a previousexaminerof AdvancedPerformance management (P5) inACCA examination published
an article onbeyondbudgeting. He examineddifferentissuesrelatingtothe applicabilityof the beyondbudgeting
model inthe private sectorandthe publicsector. The relevantissuesasare discussedbelow
A viewpointhasemergedduringrecentyearswhichchallenge the traditional approachtothe budgetingprocess
that has operatedinbothprivate andpublicsectororganisationssince timeimmemorial.While theremaybe
comfortin tradition,whatisbeingproposedmaybe more relevanttothe currentbusinessenvironmentandthe
challengesthatmustbe overcome byorganisationsfacingincreasingcompetitive pressures?Some of these ideas
are revolutionary, particularlyforthe publicsector,andindeedevenforthe private sectorwhere traditioncan
provide acomfortblanketformanagersinthe increasinglydemandingenvironmentinwhichtheyoperate.This
comfortderivesfromthe predictabilityof the traditional budgetingprocess.
In the opinionof anincreasingnumberof commentators,the applicationof traditional budgetingprocessestendsto
fix a company'sthinkingandresponse toeventsinanever-changingworld.Thislimitsflexibilityinrespondingto
these events.There isanargumentthatthe budget,ineffect,reflectsthe previousyear'sreality.Thisiswhy
organisationsandtheirmanagersplace anundue focusonpast eventsratherthanthinkingaboutcurrentandfuture
issueswithinthe organisation.
Today's organisationsvarywidelyinthe perceptionof the value providedbythe budgetingprocess.Atone endof
the spectrumthere are executiveswhoconsiderthe budget'atabletof stone'whichgivesthemcontrol.Onthe
otherhand the budgetary processisanathematomany operational managers whoview the budgetasbeinga
pointlessexercise andcompletelyirrelevanttotheirday-to-dayneeds.The mannerinwhichresourcesare deployed
isan organisation-wide consideration,andthe drive tomaximise'value-added'encompassesthe finance
department.Inthisrespectitcouldbe arguedthat traditional budgetingprocessesrequire finance personnel to
spendfartoo much time onactivitiesthatare relativelylow value.Giventhatfinance staff timeis afinite resource,
thenperhapsitwouldbe betterspentprovidingthe requisite level of supporttothe operational managerswithinan

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organisation.
Duringrecentyearsthe businessenvironmenthasbecome farmore complex,dynamic,turbulentanduncertain.
Shorterproductlifecyclescoupledwithtechnological advancementhasfocusedgreaterattentiononinnovationasa
determinantof corporate success.Althoughorganisationsneedtobe asadaptive tochange as possible,the rigidity
of the budgetserves onlytostifle innovationandresponsivenesstochange.The needtocomplywithafixedplan,
and to manage withresourceswhichmayhave beenallocatedmore thanone yearearlier,actas impedimentsthat
preventmanagersfromrespondingquicklytochanges intoday'sbusinessenvironment.
Rolling,orperhapsmonthly,budgetsfocusmanagementattentiononcurrentandlikelyfuture realitieswithinthe
organisational context.Thisisnotseenasmanagingchange,as thisisoutside the control of the organisation.Rather
it isseenasan attempttokeepaheadof change or, strictlyspeaking,tobe more incontrol of the response tothe
challengesfacingthe organisation.Thisimportance maybe emphasisedinthe knowledge-basedeconomiesthat
have developedinthe westernworld.
Knowledge-basedcompaniesface competitionwhichmayseriouslyundermineanyinnovation.Thisisparticularly
the case as productlifecyclesbecome shorter.Invariably,price levelsare fallingwhile the demandforincreased
product/service qualityisrising.Organisationsneedtobe operatingatthe excellentendof the qualityspectrumif
theyare to continue toflourishandremainclose totheircustomers.Itisarguable thattalentedmanagerswhoseek
freedom,challenge andresponsibilityare alsoinshortsupply.Suchindividualsoftenfindtraditional time-consuming
and 'legalistic'budgetprocessesoff-putting.The rapidproductionof new solutionsandstrategiesalsodependson
attractingand retainingsuchindividuals.
In thisviewof the world,the traditional budgetisseenasthe fixedplaninaccordance withwhichall management
processesare basedandaligned.Thisdetermineshow managersbehave andthe activitiesandobjectivesonwhich
theyfocus.Annual budgeting isseenasabsorbingconsiderablemanagementtime andthe monthlycomparisonsof
actual andbudgetedperformance are primarilyconcernedwithcontrol issues.Managerswill notexceedtheir
budgetsbyperhapsspendingnecessaryresourcesoutsidethe planned budgetcycle toreactto eventsbecause their
bonusesoreventheirjobsmaybe put injeopardy.
A majorproblemliesinthe factthat circumstanceswill be differentwhenthe budgetwassetandwhensubsequent
comparisonsare made and managementdecisionsrequired.Anincreasinglycompetitive global arenafurther
accentuatesthe problem.Inflexibilityisthusseenasthe keyfailingof traditionalbudgeting,andcompaniesare

66
beingurgedtomove towardscontinuousrollingforecastingtoenable speedyand coordinatedadaptationstoactual
and anticipatedchangesinthe businessenvironment.
Traditional budgetsshowthe costsof functionsanddepartments(egstaff costsandestablishmentcosts) insteadof
the costs of those activitiesthatare performedby people (egreceiptof goods,processinganddispatchof orders).
Thus managershave novisibilityof the real 'costdrivers'of theirbusiness.Inaddition,itisprobable thata
traditional budgetcontainsasignificantamountof non-value-addedcoststhatare not visible tomanagers.The
annual budgetalsotendstofix the capacityfor the forthcomingbudgetperiod,therebyunderminingthe potential
of activity-basedmanagement(ABM) analysistodeterminerequiredcapacityfromacustomer-demandperspective.
Those experiencedinthe use of ABMtechniqueswill be familiarwithsuchproblems.However,theirtaskswouldbe
much easiertoperform,andtheirresultsmore reliable,if suchproblemswereremoved.
2.8.4.1 THE 'BEYONDBUDGETING' MODEL - PRIVATE SECTOR
In the private sector,managersare forcedto considercurrentandfuture opportunitiesandthreats,particularly
where rollingmonthlyforecastsof financial performance operate togetherwithafocusonother non-financial 'value
drivers'.Inessence,the 'beyondbudgeting'model entailsdevolvedmanagerial responsibilitywherepowerand
responsibilitygohandinhand.The viewheldbyproponentsof the beyondbudgetingmodel isthatthe following
benefitsmayaccrue as a resultof itssuccessful applicationbymanagement:
 It createsand fostersaperformance climate basedoncompetitivesuccess.Goalsare agreedviareference
to external benchmarksasopposedtointernally-negotiatedfixedtargets.Managerial focusshiftsfrom
beatingothermanagers fora slice of resourcestobeatingthe competition.
 It motivatespeople bygivingthemchallenges,responsibilitiesandclearvaluesasguidelines.Rewardsare
team-based,inrecognitionof the factthatno single personcanact alone to achieve goals.
It devolvesperformanceresponsibilitiestooperational managementwhoare closertothe 'action'. Thisuses
the 'know-how'of individualsandteamsinterfacingwiththe customer,whichinturnenablesafarmore
rapidadaptationto changingmarketneeds.
 It empowersoperational managerstoact by removingresource constraints.Keyratiosare set,ratherthan
detailedline-by-linebudgets.Forexample,gearingandliquidityratiosmaybe usedtoshow there isenough
cash inthe bankto meetliabilities.Local accessto resourcesisthusbasedon agreedparametersratherthan

67
line-by-linebudgetauthorisations.Thisisaimedatspeedingupthe response toenvironmental threatsand
enablingquickexploitationof newopportunities.
 It establishescustomer-orientatedteamsthatare accountable forprofitable customeroutcomes.These
teamsagree resource andservice-level requirementswithservice departmentsviathe establishmentof
service levelagreements.
 It createstransparentandopeninformationsystemsthroughoutthe organisation,whichshouldprovide
fast,openand distributedinformationtofacilitate control atall levels.The ITsystemiscrucial inflexingthe
keyperformance indicatorsaspartof the rollingforecastprocess.
Figure 21: Summary of beyondbudgetingmodel-private sector

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2.8.4.2 THE PUBLIC SECTOR
The legal frameworkof publicsectororganisationswouldprobablypreventsuchasystembeingintroduced.Aswith
all alternatives,the successof a particularprocessdependsonthe needsof the individual organisation.The
alternative of the beyondbudgetingmodel placesconsiderable emphasisonthe needfororganisational,managerial
and cultural changesinorderthat it maybe successfullyappliedbyorganisations.Thiswill presentconsiderable
behavioural challengesandindividual managersmightbecomeoverwhelmedbythe complexityof decision-making
insuch an unregulateddecision-makingenvironment.
In the publicsector,the budgetprocessinevitablyhasconsiderable influence onorganisational processes,and
representsthe financial expressionof policiesresultingfrompoliticallymotivatedgoalsandobjectives.Yetthe
realityof life formanypublicsectormanagersisan increasedpressuretoperformina resource-constrained
environment,while alsobeingsubjectedtogrowingcompetition.Inessence,apublicsectorbudget:
 establishesthe level of income andexpenditure
 authorisesthatexpenditure,once agreed, outof the plannedincome
 acts as a control on expenditureandincome
 communicatespoliciesandplans
 focusesattentiononthe future
 motivatesmanagersandstaff.
While these issuesmaybe commonwiththe private sector,anumberof issuesarise whichare specifictothe public
sector.For example,UKlocal authoritiesare preventedbylaw fromborrowingfundsforrevenuepurposesor
budgetingfora deficit.If the beyondbudgetingmodelistoallow greaterfreedomformanagersthenitwill take a
considerable change of mindsetinthe publicsectortoachieve the flexible agendaenvisaged,especiallywheresuch
flexibilitywouldinvolve considerable andincreaseddelegationtomanagers.One wonderstherefore,froma
behavioural perspective,if suchmanagersare capable of makingthischange,as itwouldentail the adoptionof a
radicallydifferentapproach.Local authorityfinancial regulationsalsotendtopreventthe transferof fundsfromone
budgetheadto another(otherwise knownasvirement)withoutcompliance withvariousrulesandregulations.
These rules(expressedinthe financialregulationsof publicsectororganisations) will be consistentwiththe policie s
of the organisationandare designedtopreventexpenditure onitemssuchaspermanentstaff where suchcosts
wouldgobeyondthe budgetyearandrepresentacommitmentof future resources.
Budgetsinthe publicsectortendto concentrate onplanningfor one financial yearahead.Attemptsare beingmade
by UK central government,throughthe comprehensivespendingreview,toplace anemphasisonthe longer-term.

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However,considerabledifficultiesexistwithinthe individual organisationsthatmake upthe publicsectorwhen
creatinga budgetsystemthatreflectslonger-termobjectivesandgoesbeyondthe annual cycle.Italsoremainsto
be seenhowthe relativelynewsystemof resource accountingincentral governmentwillfitintothe budgeting
framework.
Traditional methodsof budgetinginthe publicsectorcentre onthe bidsystemandincremental budgeting.These
approachesfocuson changesat the marginand generallyreflectacceptance of the budgetbase fromthe previous
year.Thisis partlya reflection of the size andcomplexityof publicsectororganisations,butalsothe internal political
powerof large departments,whichprotecttheirpositionsthroughtheirrelative strength.Bidsystemsalsominimise
conflict,asdebate andpowerstrugglesare onlyconcernedwiththe 'incremental'items.More advancedapproaches
are representedwithinfinancial planningsystems,andinclude suchconceptsaszero-basedbudgetingandplanned
programme budgetingsystemswithatimeframe greaterthanone year.
Whetherthe publicsectorcan adaptto the conceptof greaterflexibility - whichliesatthe heartof beyond
budgeting- remainsamatterof ongoingdebate.Suchanadaptationwouldrequire amindsetwhichnotonlymoves
away fromcontrol but alsorequiresareductioninthe internal political powerof large departmentswhichhasbeen
at the heartof publicsectorbudgetingformanyyears.
The desire togenerate improvedperformance - essentiallyconsideredthe driverforthe beyondbudgetingmodel -
ispresentin the publicsectorevidencedininitiativessuchaskeyperformance indicatorsand'bestvalue'plans.But
thisisnot matchedby a desire forthe flexibilityinherentinthe model.Intermsof beyondbudgeting,managersin
such organisationsare likelyto remainconstrainedbythe inabilityof theirorganisationtochange.
2.9 CONCLUSION
We see the beyondbudgetingmodelashavingparticularrelevance forknowledge-basedcompanieswhichare
increasinglyafeature of adevelopedeconomy.Othercompanies maysee specificbenefitsinsucha system,given
the rapidlychangingenvironmentinwhichtheyalsooperate.These changeswill notbe introducedwithoutconflict
and difficultydue tothe challengesfacedinintroducingchange.Suchchallengesmaybe beyondthe achievementof
the publicsector,due to the expressioninthe budgetof politically-motivatedpoliciesandobjectivesdeveloped
withinacomplex legal andfinancial framework.Whatwe can say,however,isthatif we are to see the successful
applicationof the beyondbudgetingmodel inbothprivate andpublicsectors,thenthismustbe underpinnedbya
considerable organisational,cultural andmanagerial change.Otherwise itisdoomedtofailure.

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Figure 22: Summary of beyondbudgetingmodel-publicsector

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Table 2: Comparing traditional and beyondbudgetingprocess

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Figure 23:Traditional budgetingmodel versusthe beyondbudgetingmodel
2.10 The Beyond BudgetingRound Table (BBRT)
The BeyondBudgetingRoundTable (BBRT),anetworkdesignedtotransformthe traditional budgetsystem, studied
14 companieswithoutbudgetsoralmostwithoutbudgetsandfrom thistheyproduced12 guidingprinciplesto
BeyondBudgeting:
i.Measure performance againstthe competition,notinternal targets.
ii.Motivate employeesbyempowerment.
iii.Delegationtodivisionalmanagersallowsthemtotake responsibility.
iv.Give operational managersindependentaccesstoresources.
v. Create customerfocusedteams.
vi.Provide transparentinformationsharingacrossthe organization.
vii.Settargetson external benchmarks.
viii.Rewardsinline withbeatingthe competitors.
ix.Allowmanagerstobe involvedwithstrategyplanning.
x.Grant managementaccesstolocal resources.
xi.Coordinate the internal use of resources.
xii.Performance measurementinformationshouldbe available freely. (Daum, 2002)

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Pilkington&Crowther(2007) have foundthat BeyondBudgetingismost commonlyadoptedbylarge firms
employingover1,000 people.The smallerfirms(10- 50 employees) tendtoimpose strictbudgetsforemployeesto
follow.Thisislikelytobe due tothe size,managementstyle andabilitytotrainstaff inunfamiliarconcepts.
DeWaal (2005) suggestsanentryscan before implementingBeyondBudgetingto ensure thatstaff feelsthe current
systemsare failing.The scancreatesdiscussioninto whetherstaff wants,andif the organizationcan,implements
BeyondBudgeting.
The main advantage of questioningthe employmentof BeyondBudgetingisthatstaff will
feel involvedindecisionmakingandinternal businessprocesses. BeyondBudgetingappearstohave many
advantagesovertraditional systemsbutitisnotwithoutcriticismof itsown.
CIMA (2007) believethathavingnobudgetcreates variousproblems.A businesswill have noframeworkfor
planning,coordinatingand controllingitsactivities.The businesscanlose direction withoutdetailedplansof its
currentpositionandfuture goals.Finally,adrasticculture change can leave employees
feelingdisillusionandthe decentralizedstructure maybe impractical forsome organizations.
An alternative optionforfirmsthatstill wantaformal budgetingsystemisBetter Budgeting.
BetterBudgetingentailsfive techniquesthatcanbe usedto overcome some of the limitationsof traditional
methods(Neelyetal,2003).
ActivityBasedBudgeting involvesplanningusingvalue addingactivities,followingasimilarconcepttoABCand
ABM. Zero Base budgetingforcesmanagerstojustifytheirbudgetseveryyeartotry and preventdysfunctional
behaviorandbudgetgames.Thirdly,aValue Basedtechnique encouragesafocusoncreatingshareholderwealth
and linkageswithstrategy.Profit methodsconsiderbothshortandlongterm projectionswhilstensuringsufficient
cash isgenerated.Finally,RollingBudgetscreate frequentbudgetstoprovide more accurate forecasts.
A major problemwith BetterBudgetingtechniquesisthattheycanactually take evenmore managementtime tobe
usedeffectively,whichislikelytocause greater dissatisfactionwiththe processes.
The BeyondBudgetingmovementisstill inthe earlystagesof developmentand Rickards(2006) feelsthatfurther
researchand practical implementationsare required before areal breakthroughinmanagementaccountingis
achieved.
Beckeret al (2009) believe thatthe initialfascinationwithBeyondBudgetingisfadingandthatsome
principlesare beingputintopractice,justnotunderthe umbrellaof BeyondBudgeting.

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Decentralizationandempowermentmaybe growinginpopularitydue tothe current businessenvironment.
2.10.1 The BeyondBudgetingor CoherentModel
In an article by Hope,Fraser,Brunce and Roosli onBeyondBudgetingorCoherentModel.
Theyopine thatcoherentmodel workswith,notagainstthe bestside of humannature (McGregor’sTheoryY),it is
suitable forpost-industrial knowledge-basedorganizations,itsupports the successfactorsthatmustbe met in
highlycompetitive businessconditionsanditisconsistentwithcyberneticsandsystemstheory-themostrelevant
managementscience. Twelveprinciplesprovidemanagerswitharobust,albeitempirical frameworkfor evaluating
where theirorganizationsstandtodayandguidingthemtowardsanalternative managementmodel.
Table 3: The principlesof the coherentmodel
Source: An Article on Beyond Budgetingor Coherentby Hope, Fraser, Bunce and Roosli

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Table 4: How leadersneedto change to meettoday’s competitive successfactors

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In the same article byHope,Fraser,Brunce andRoosli onBeyondBudgetingorCoherentMode theyseem
contendedthat:
“Devolving accountabilityforresultsand replacing ‘fixed performancecontracts’with moreadaptivesteering
mechanismswill create a managementmodelthatwillenable an organization to:
 Respond morequickly to changeand bebetter able to dealwith increasing levels of uncertainty and
complexity.
 Attractmore talented managersand potentialstrategicpartners
 Generate a far better climate forgenerating breakthrough strategiesaimed atimprovementand growth
 Operateat lowercost
 Find and keep the right customers
 Minimize dysfunctional,and encourageethicalbehavior
 Createsustained growthin shareholderwealth
It is alwaysa risk to makechangesasprofound asthoserequired in introducing a devolved leadership modelbut
the greaterrisk in thelong run is to continueto usea managementmodelthatisnot aligned with today’sCSFs
and worksagainsthuman nature. Asincreasing numbersof organizationsadopta managementmodelthat
supportstoday’scompetitivesuccessfactors,thosewho do notmustfallbehind and eventually be forced to
change,orfail to survive. Thosewho adoptit early will gain the greatestrelative advantageoverthosewho wait
becauseits potentialbenefitsare so great and it is very hard to copy. So it is notreally a matterof whetheror
even when,it’s now! Its time hascome.”
BBRT is keentostressthat beyondbudgetingisnotaboutnew toolsor techniques,itisa management
philosophybasedonasetof principlesdevelopedfromreal casesleadingtoadaptive performance
management. The managementtoolsthathave beendevelopedinordertoaddressproblemscausedbythe
traditional budgetingmethodsandchangesinthe external environmentalreadyexist.
Hope and Fraser,(2003, 178) pinpointsoutthe modelsasfollows;
“-Shareholdervaluemodels-such aseconomicvalueadded (E.V.A) and valuebased management(VBM),
align thedecisions of internal managerswith theexpectationsand interestsof externalshareholders.
-Benchmarking models-enablefirmsto comparetheir performancewith thebest-in-classcompaniesaswell
as withinternal peers and display the results in terms of ranking lists.
-The BalanceScorecard- providesa strategicframeworkforlocaldecisions and providesleading K.P.Isthat
tell managers,if strategicgoalsare being met.

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-Activity-based management- informsmanagersaboutthecausesof costsand thusbetterequips themto
understand thenetprofitcontributionsof products,channels and customers.
-Customerrelationship managementmodels-focusmanagerialactionson knowing and satisfying customer
needsprofitably. They change“makeand sell” corporatecultureto “anticipateand respond”culture.
-Enterpriseinformation systemsand rolling forecasts-combinedifferentfunctionsof theorganizationand
enablemanagersto relate workand cost inputsto customeroutputsacrossthebusiness. They also enable
managersto betteranticipate eventsby providing fastactuals,integrated forecastsand market
intelligence”.
In myown opinion,inorderforthese managementtoolstodeliverpositiveresults,theyhave tobe properly
implementedandinconducive organization environmentwherebystrategicplansare alignedtooperational
units,teamworkencouragedtoreduce goal incongruencyandcommunicationwithinthe organizational
facilitated. The decisionmakersneedtohave the authorityandcapabilitiesof actingonthe informationthat
theyreceive fromthe management.
Figure 24: Managementtools and their relationshipwithbudgeting

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2.11 Balance Scorecard
As definedbyKaplanandNorton(1996), “The Balanced Scorecardtranslatesanorganization’smissionandstrategy
intoa comprehensivesetof performance measuresthatprovidesthe frameworkfora strategicmeasurementand
managementsystem”.Thisstrategicmanagementsystemmeasuresorganizational performance infour‘balanced’
perspectives:
Financial – summarizes“the readilymeasurable economicconsequencesof actionsalreadytaken”.
Customer– containsmeasuresthat“identifythe customerandmarketsegmentsinwhichthe businessunitwill
compete andthe measuresof the businessunit’sperformanceinthese targetedsegments”.
Internal BusinessProcess – measuresthe “critical internal processesinwhichthe organizationmustexcel”.
Learning & Growth – measuresthe “infrastructure thatthe organizationmustbuildtocreate long-termgrowthand
improvement”.
To create a BalancedScorecardan organization’smanagementteamtranslatesthe mission,vision,andstrategyof
the firmintoa scorecard.The scorecard measuresshouldrepresentbothlong-termandshort-termsuccessinthe
executionof the strategy.The measuresare arrangedinthe fourperspectives.The scorecardshouldcontainboth
outcome measuresthatindicate excellentpriorperformance,alongwiththe performance-driversthatcreate
successful future performance.
This ‘balanced’ framework enables a management team to execute the following four strategic
management processes:
 Clarify and translate vision and strategy.
 Communicate and link strategic objectives and measures.
 Plan, set targets, and align strategic initiatives.
 Enhance strategic feedback and learning.
These four strategic management processes are the keys to the Balanced Scorecard theory.

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Figure25:Usingthe BSC as a strategic managementsystem
Source: Kaplan and Norton, (1996)
2.12 BalancedScorecard as a managementcontrol tool
Managementcontrol systems(MCS) are the informationsystemsandthe variousapplicationssoftware’sthat
managersuse to directthe behaviorandactionsof its memberstowardsthe goalsof the company.
Otley(1994) define managementcontrol as“the processbywhichmanagersassure that resourcesare obtainedand
usedeffectivelyandefficientlytoaccomplishthe goalsof anorganization.
In anotherstudy,Otley(2003),considersthe BSCas a novel managementcontrol tool. Infact,the BSC was designed
to serve asa control tool for managersoriginally.
In theirearlierwritingsonthe BSC,KaplanandNorton(1992) define BSCasa setof measuresthatgive top
managersa fast viewof theirbusiness. These measureswereaimedtohelpmanagerscontrol theirorganization. To
use BSC as a managementcontrol tool involvesfourprocessesshowninthe above figure namely:

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 Clarifyingandtranslatingthe visionandstrategyof the organization. Thisprocessenablesthatmanagers
agree on the directionthe companyshouldfollow andmake itknowntootheremployees. Thisinvolves
settingappropriate targetsandmotivatingthe employeestoreachthem.
 The secondprocess,communicationandlinkingensuresthatthe goalsof the organizationismade knownto
all the differentunitsof the organization. The processinvolveslinkingthe businessunitgoalstothose of the
organization. Italsoinvolvescoordinationof the variousdepartmental activitiessuchthata commonvision
issharedamong organizational participant.
 The third process,planningandtargetsetting,ensuresthe businessplansisinline withthe financial goal. In
the planningandtargetsettingprocess,the how to achieve organizationalgoalsare elucidatedandthe
measuresinthe BSCare usedas the basisto allocate the resources.
 The final process,feedbackandlearning make sure adequate feedbackisreceivedfromthe various
activities. The feedbackprocess beginswithaclarificationof vision forthe organization. The whole process
forma loop,wherebythe feedbackreceivedfromthe managementprocessare thenusedagaintoreshape
corporate strategyand the processgo on andon.
Kaplanand Norton, (2001:281) suggestthat companiesshouldfollowastep-downprocedure tomake transition
fromhigh-level long-termstrategygoalstoannual budgetsforlocal operationsinthe followingway.
1. Translate strategyintothe Balance scorecardby definingthe strategicobjectivesandmeasures.
2. Setstretch targets forspecificfuture timesforeachmeasure andidentifyplanninggapstomotivate and
stimulate creativity.
3. Identifystrategicinitiativesandresource requirementstoclose the planninggaps,therebyenablingthe
stretchtargetsto be achieved.
4. Authorize financial andhumanresourcesforstrategicinitiativesandembedthese requirementsintothe
annual budget. The annual budgetshouldconsistof twocomponents- astrategybudgettomanage
discretionaryprogramsandanoperatingbudgettomanage the efficiencyof departments,functionsand
line items.

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Figure 26: Linkingstrategy to budgetsin a step-downprocedure
2.12.1 Strategy-Focused Organization
The latestrefinementof thisconceptdevelopedfromthe experiencesof companies implementingthe Balanced
Scorecardinto theirstrategicmanagementprocesses.KaplanandNortonfoundthatimplementationof strategyis
as importantas the developmentof strategy.Theypropose thatsuccessful strategyimplementationincorporates
the followingfive strategicmanagementprinciples(Kaplan&Norton,2001):
• Translate the strategyto operational terms.
• Alignthe organizationtothe strategy.
• Make strategyeveryone’severydayjob.
• Make strategya continual process.
• Mobilize change throughexecutiveleadership.
Withinthe five principlesthereare several elements.These new elementsaddthe followingnew sectionstothe
theory:
• StrategyMaps – Strategyalignedwiththe value proposition(see figure1).
• Personal Scorecards – Strategyalignedwithpersonal objectives.
• BalancedPaychecks – Incentive compensationalignedwithteam-basedgoals(scorecard).
• Strategic& Operational Budgeting –Strategyfunded.

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• OpenReporting–All employeesgetthe informationandmanagementmeetingsheldtodiscuss
performance.
• Change Management– The BalancedScorecard isa change managementprogram, enabledbythe
scorecard.
One of the mostuseful additionstothe BalancedScorecardtheoryisthe BalancedScorecardStrategyMap (Kaplan
& Norton,2001). A well-developedstrategymapclearlyillustratesthe company’sstrategyandthe measuresof
successfor the strategy.A template fora strategymap is illustratedonthe below diagram.
Figure 27 : Balance Scorecard Strategy Map (Kaplan & Norton, 2001)

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Figure 28:The principlesofstrategy-focusedorganization

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2.12.2 Summary of Literature Review:
As the environmentinwhichorganizationscompetechangessomustbudgetingsystemstosupportstrategic
objectivesandcompetitive priorities. However,whattype of change will be implementedbyvariousorganizations
isvariedand notany particularbudgetingcanbe prescribedforall organizations. Different organizationadapts
differentbudgetingmethodsbasedontheirsize,financialability, andstrategicplans.
Everycompanyhas unique requirementsfortheirfinancial planning.
It isnot a simple choice betweenthe alternatives methodsdiscussed inthisresearch study.Itcan be
one of them,butitcan alsobe a tailor-made system, includingcharacteristicsfromthe other
systemsaswell.Beyondbudgetingcouldeasilybe discardedasamanagementtrend,whichhas
no chance againsttraditional budgetinginthe longrun.However,itmightnotbe the case.If the
managementconsultantjargonisfilteredoutfromthe beyondbudgetingliterature andthe concept
examinedobjectively,itcouldreveal muchbetterpracticescomparedto the old traditional budgeting
and openupa seriousdebate onthe viabilityof the latterone.
The other alternative budgetingmethodsincomparison to the traditional budgetingmethod:
The alternative methods are Activity-basedbudgeting(ABB),Rollingbudgets(RB),Zero-basedbudgeting(ZBB),
Balance Scorecard(BSC) and Beyondbudgeting(BB)
The alternative methodsare analyzedonlyonthose aspectsthatare differenttotraditional budgeting.The concept
of BeyondBudgetingisthe most radical approachwhichadvocatesfortotal abandonmentof the traditional
budgeting,withthe changesin nearlyeveryaspectof traditional budgeting.,theyofferagreat deal of supportto the
decentralizedtype of companiesthatwantto devolve the powerof decisionmakingtofrontlinemanagersand
employees. The performance managementandcapital budgetingare separatedfromfinancialplanning. Interms
of goalstheysetaspirational goalsaimedatcontinuousimprovementandnotfixedannual targetslike inthe old
traditional budgetingmethod.
In termsof rewards, theyshare successbasedonrelative performance andnotonmeetingfixedannual targets. In
termsof resources,theymake resourcesavailable asneedednotthroughannual budgetallocationsandintermsof
planning,it’sacontinuousandinclusiveprocessandnotan annual eventlike inthe oldtraditional method.

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The Balance Score card emphasizesonthe use of financial andnon- financialindicators andinsistsonhavingalink
betweenthe strategicplansandthese indicators. BSCallowsmanagerstolook atthe businessfromfourimportant
perspectives simultaneously (financial,customer,innovationandlearningandinternal businessperspective). BSC
guards againstsub-optimizationbyforcingmanagerstoconsiderall the importantoperational measurestogether.
Generallythe BSCdemandsthatmanagerstranslate theirmissionstatementsintospecificmeasuresthatreally
matter.
Both Activity-Basedbudgetingandrollingbudgetingfocuses mainlyonthe changesinthe budgetingmethodand
process but seemtobe verytime consumingincomparisontothe oldtraditional budgetingmethod. Rolling
budgetsare focusedoncontinuousbudgetingwhichisnormallytriggeredbyimportantchangesandnotbycalendar
or annual events.While the ABB isgeneratedfromthe activitiesandresourcesandit’sfocusedonthe process
rather thanon the budgetresults.
The ZBB startseach year’sbudgetfromzero,itevaluatesandrequiresjustificationof all currentcostsand can be
verytime consuming. ZBBfocusesitsattentiononthe value formoneyandmakesexplicitthe relationshipbetween
the inputof resourcesandthe outputbenefits. Italsodevelopsaquestioningattitude andmakesiteasierto
identifyinefficient,obsolete orlesscost-effectiveoperations. If properlycarriedout,itshouldresultin amore
efficientallocationof resourcestoactivitiesanddepartments.

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Figure 29: The impact of advanced budgetingtechniquesonold traditional budgeting

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Chapter 3.0 RESEARCH METHODOLOGY
3.0 Introduction
The objectivesof thischapterwere to:
 To justifythe study’sresearchmethodologybygivingtheirmerits
 To criticize the priorperiodmethods
 To explainthe researchmethodologyusedinthe study,and
 To demonstrate howresearchdesign,anddatacollectionandanalysiswere utilizedtoanswerthe research
objectivesand questions asoutlinedinthe chapter1.
Researchmethodologyisasystematicwayto solve aproblem.Itisa science of studyinghow researchisto be
carriedout. Essentially,the proceduresbywhichresearchersgoabouttheirworkof describing,explainingand
predictingphenomenaare calledresearchmethodology.Itisalsodefinedasthe studyof methodsbywhich
knowledge isgained. Itsaimistogive the work planof research
3.1 Criticismof Prior researchmethods:
Giventhe substantial amountof researchonbudgeting,itwouldbe fairtoassume thatthe researchproblemcould
solvedentirelybasedonliterary.However,eachcompanyhasunique characteristicsintheirbusinessandtheir
managers’managementphilosophy,whichhave ahuge influence onhow the budgetsare made andhow theyare
beingused.
Otley(1978), inhisresearchstatedthat:
“The effectivenessof a managementaccounting systemdependsnotonly on theappropriateness of its
technical characteristicsto the particularorganizationaland environmental circumstancesto which it is
applied,butalso on the way in which organizationalparticipants makeuseof theinformation thatit
provides.”
Thisis the reasonwhyso manybudgetingresearchesare focusedonachosenfieldof business
and on a particularissue inthatscope.If the researchhasnot beena case study,the chosen
companiesfora fieldstudyare inmostcasesfrom the same industry.
Covaleski’s&Dirsmith’s (1986) researchas well asAbernethy’s&Stoelwinder’s(1991) were focusedonhospitals,
whose environmentdiffersgreatlyfromprofessional servicescompanylike inthe case studyA company inthis
research.
Many researchesare focusedonone particularissue,suchasbudgetarycontrol (VanDerStede,

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2001; Covaleski &Dirsmith,1986; Bruns & Waterhouse,1975; Frow et al.,2010) or on the
inherentproblemsof budgets(Merchant,1985; Lukka,1988; Bunce et al.,1995; Hope &
Fraser,2000; 2003; Libby& Lindsay,2003). One of the biggestchallengesinanalyzingthe
currentsituationinbudgetingisassessingthe objectivityof the previousresearch.
As Ekholm& Wallin(2000) pointedout,manyof the researcherspushingforbeyondbudgetingare working as
managementconsultants,andcouldtherefore have ulteriormotivestopusha completelynew system. The same
kindof problemisinheritedtoall budgetingresearchas the management
philosophyaffectstothe researchers’wayof thinking.
There are some challengesregardingthe researchonalternative budgetingsystems.Since they
still are so newconcepts,theirresearchresultsare somewhattheoretical aspointedout by
Hansenetal. (2003).
Thus,underthese circumstancesthe researchescanhave different conclusionsbetweenafew years.In2003 Libby
& Lindsaycriticize traditional budgetingand are compelledtowardsthe beyondbudgetingconcept.However,in
theirresearchonthe issue in 2010, theirresultsare muchmore favorable towardstraditional budgeting.
It shouldbe notedthatalsoearlybudgetingresearch (Argyris,1953; DeCosterandFertakis,1968) discussed
dissatisfactionwithbudgets butprimarily focusingonthe supervisor’swayof usingbudgets.
The more recentcritique againstbudgetsfocusesonseveral topics.The use of budgetingforPerformance
evaluationiscriticizedformotivatingto dysfunctional behaviorinthe formof budgetgaming( Jensen, 2001) and the
traditional budgetingprocess iscriticizedforbeingtoocostlyaprocesstakingup valuable managementtime (Hope
and Fraser,2003a). The critique alsofocusesonthe changing businessenvironment.Thus,Bunce etal.(1995) argue
that the businessenvironmenthas become highly competitive andvolatileandthattraditional budgetingisnot
suitable forthese
newconditions.
Likewise,Hope andFraser(2003a) argue that traditional budgetshave difficultyincopingwithtoday’suncertainand
turbulentenvironment astraditional budgetsare suitedformore stable conditions.Wallander(1999: 419) calls
traditional budgeting“[...] an outmodedwayof controllingandsteeringacompany”.
As pointedoutbyHansenetal. (2003), the researchon budgetinghastosome extentignored some of these
concernswithbudgetsprevailingamongpractitioners, andthereby adisconnectionbetweenresearchand practice
mighthave been createdalthough some researchbasedarticleshave beenpublishedconcerningthe Beyond
Budgeting(BB) idea(EkholmandWallin,2000; Hansenetal.,2003; Neelyetal.,2003;Libby andLindsey,2010;
ØstergrenandStensaker,2011).

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The survey-basedpartof the existingBBresearchshowsthatrelatively fewcompanies have abandonedorplanto
abandonthe traditional annual budget(Ekholm andWallin,2000) andthat budgetstoa large extentcontinue tobe
usedformotivationand performance evaluation(LibbyandLindsey,2010).These twostudiesfound arelatively
positive attitudetowardsbudgetsingeneral,butnone of the studies examinedwhetherthe environmental
uncertainty whichmakesthe traditionalannual
budgetobsolete incertaincase studies.Thiswillbe the primaryfocusof thisresearch paper.
Many prior researcheshave focusedonone particularissue,suchasbudgetarycontrol (VanDerStede,2001, Frow
et al,2010) or the inherentproblemsof budgets(Merchant,1985, Hope & Fraser,2000, 2003).
As Ekholm& Wallin(2000) pointedoutmanyof the researcherspushingforbeyondbudgetingare workingas
managementconsultantsandcouldtherefore have ulteriormotivestopushfora completelynew system. The same
kindof problemisinheritedtoall budgetingresearchasthe managementphilosophyaffectsthe researchers’wayof
thinking.
There are some challengesregardingthe researchonalternative budgetingsystemssince theyare still verynew
concepts,theirresearchresultsare somewhattheoretical aspointedout byHansenetal (2003). Thus,underthese
circumstancesthe researchescanhave differentconclusionsbetweenafew years.
Libbyand Lindsay, (2003) criticizedthe traditional budgetingandwere compelledtowardsthe beyondbudgeting
concept.
Libbyand Lindsay(2010), howeverintheirfurtherresearchonthe issue,theirresultswere muchmore favorable
towardstraditional budgeting.
The previousresearchonbudgetingare usedtooffergeneralizedissuesonthe topicbuttheycannot provide a
straightforwardsolutiontothe researchproblemasbudgetingmustbe examinedthroughitsenvironmentand
users,like inthe Case studyA scenario.

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3.2 Research Philosophy:
3.2.1 Quantitative Research:
Quantitative (positivist) studiesshow trendsthat explainphenomenathatoccur generally. Theycountphenomena
fromwithina sample thatrepresentsthe widerpopulation.
“the assumption behind thepositivistparadigmisthatthere is an objectivetruth existing in the world which
can berevealed…..measuring relationshipsbetween variablessystematically and statistically” (Cassell and
Symon,1995a)
Turner(1994:195-6) notesthat‘ we are obligedtocategorise tosome degree the eventsandphenomenawhichwe
encounterinthe world,if we are to bringany orderto our experiences…butwhathappensif the sample isnot
typical? Thisisparticularlyanissue….wherethe organisationscanbe veryheterogeneous,suchasinthe case of
differentcompaniesinvariousindustriespractisingtraditional budgeting. Addedtothisisthe restrictionof
quantitative studiestothatwhichisquantifiable whichexcludesinvestigationintoprocess. Therefore,quantitative
researchwasrejectedasan approach.
Under the naturalist–constructionistparadigm, the factthatinterviewersorobservers reachdifferentconclusionsis
not considered problematic,since meaningisalwayscontextualandalwaysinterpreted.If one interviewee says the
meetingwasasuccessand anothersaysit was a failure,apositivistwouldsay thatone isprobablywrongor being
deceptive.
But the naturalist–constructionistwouldsaythatthis apparentcontradictionisintriguing,thatboth
intervieweescouldbe speakingthe truthasthey see it,and thenwouldtryto explore what“successful
meetings”or“unsuccessful meetings” meanttoeachof the speakers.Positivistsassume thatrespondents
understandthe meaningof theirquestionsinanidentical way;constructionists are more likelytoassume that
interviewees have differentframesof reference andthento try to discoverthe lensesthroughwhichtheir
intervieweessee the world.
Positivistsaimtoworkout theoriesthatapply topeople orsocietiesbroadly.Naturalistsfocus
more on themesthatare true at some time or in some places,while workingtolearnwhichelements
of a complex environmentaffectedwhat wasseenorheard.Qualitativeworkisjudged more onitsfreshness—its
abilitytodiscovernew themesandnewexplanations—thanonitsgeneralizability.
It isalso evaluatedforitsrichness, vividness,andaccuracyindescribingcomplex situationsorcultures.The quality
of evidencethatsupportsthe conclusionsisimportant,asare the soundnessof the designandthe thoroughness of
the data collectionandanalysis.

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Thissupportedfurtherthe use of qualitativeresearchmethodforthisstudy,asIwas tryingto discoverwhetherthe
alternative methodsof budgetingwere betterthanthe oldtraditional budgetingmethodasaplanningand
managementcontrol tool.
3.2.2 Qualitative Research
Variousmethodscanbe usedto achieve qualitative(phenomenological/interpretative) analysise.g.observation,
biographicanalysis,interviews. The aimisto ‘describe andanalyse the culture andbehaviourof humansandtheir
groupsfrom the pointof viewof those beingstudied.(Bryman,1998,46)
and to collect andanalyse datawhichis ‘uncountable’(CassellandSymon,1995b).
Qualitative researchisusedwhenwe wanttounderstandacircumstance intermsof how and whyit occurs (Cassell
and Symon,1995c). Qualitative techniquescanbe usedas a meansof obtainingthiskindof informationbecause
rather thantestingconceptsintermsof fixedempirical referents,theyaffordus‘experiential understanding’
(Stake,1995:40) while still allowingforcomparison(Yin,1994:14)
A case studyconsistsof two formsof design:the single-caseormultiple-case design.Yin(2003,pp. 40-42) givesfive
rationalestochoose forthe single-case design.One of the rationalesis:“when itrepresentsthe critical casein
testing a well-formulated theory”.1
Thisthesisaddressesthe organizational theory,andasYin describes:
“The theory hasa specified clear set of propositionsaswell asthe circumstanceswithin which the propositionsare
believed to be true.”
There are three conditionstodecide onthe correctstrategy,namelya) the type of researchquestionposed,b) the
extentof control an investigatorhasoveractual behavioural eventsandc) the degree of focusoncontemporaryas
opposedtohistorical events. Table 5displaysthe three conditionsandshowshow thisisrelatedtothe five major
researchstrategies(Yin,2003, p. 5).
1Other rationales are when the case represents an extreme/unique, representative/typical, revelatory or longitudinal case.

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Strategy Form of Research Question
RequiresControl of
Behavioural Events?
Focuseson
Contemporary
Events?
Experiment How,why? Yes Yes
Survey
Who,what, where,how
many,howmuch?
No Yes
Archival
Analysis
Who,what, where,how
many,howmuch?
No Yes/No
History How,why? No No
Case Study How,why? No Yes
Table 5: The three conditionsrelatedto the five major research strategies
Source: Adaptedfrom Yin (2003:5)
Qualitative researchisconcernedwithqualitative phenomenoninvolvingquality.Some
of the characteristicsof qualitativeresearch/methodare:
• It isnon-numerical,descriptive,appliesreasoninganduseswords.
• Itsaim isto get the meaning,feelinganddescribe the situation.
• Qualitativedatacannotbe graphed.
• It isexploratory.
• It investigatesthe whyandhowof decisionmaking.
3.3 Validity,reliabilityandgeneralization
3.3.1Data quality issuesassociatedwith semi-structuredandin depth interviews;
The lack of standardizationinthesetypesof interview mayleadtoconcernsaboutreliability. Inrelationto
qualitative research,reliabilityisconcernedwithwhetheralternativeresearcherswouldreveal similarinformation
(Silverman,2007).
Saunders,LewisandThornhill,(2012) note that the concernabout reliabilityinthesetypesof interview isalso
relatedtoissuesof bias. Anintervieweemay,inprinciple,be willingtoparticipate butmayneverthelessbe sensitive
to the unstructuredexplorationof certainthemes. Intervieweesmaytherefore choose nottoreveal anddiscussan
aspectof the topicthat you wishtoexplore,becausethiswouldleadtoprobingquestionsthatwouldintrude on
sensitiveinformationthattheydonotwish,orare not empoweredtodiscusswithyou.

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In termsof validityandreliability,constructive researchmethodhasafew threats,mostly
relatingtothe data collectionthroughinterviewsandresultanalyses.Firstof all,the
intervieweescanhave hiddenagendas,whichwouldaffecttheiranswers.The researchercould
be biasedandinterpretthe resultstowardsthe desiredgeneraloutcome.There are usually
limitationstothe qualityandquantityof the data available,whichcouldexclude something
crucial.Also,the intervieweescouldconsciouslymisleadthe interviewerandtherefore their
answersshouldbe acceptedwithoutcritical thought(Labro& Tuomela,2003).
In qualitativeresearch,validityismore concernedonactuallycapturingwhatisinitiallyintendedand
accuratelyreportingwhatwasobserved(Ali &Yusof,2011).
There isalso a problemthatthe resultscanbe hard to separate fromthe particularresearches
context,since itisaffectedbythe interviewees’opinionaswell asthe researcher’stheoretical
interests.Therefore,the researchcannotbe replicated,eventhoughthe same researchwouldbe
conductedonthe same organizationbytwodifferentresearchers(Ahrens&Chapman,2006).
Thisproblemwastakenintoconsiderationwhencreatingthe interview questions.Asthe
interviewswere semi-structured,the questioneasilycouldhave become leadingtowardsthe
answersthe researcherwashopingfor.Thiswasespeciallyapparentregardingthe alternative
budgetingmethodquestions.
3.3.2 Reliability
One response tothe issue of reliabilityisthatthe findingsderivedfromusingin-depthorsemi-structuredinterviews
are notnecessarilyintendedtobe repeatable sincetheyreflectrealityatthe time theywere collectedinasituation
whichmay be subjecttochange (Marshall and Rossman,2006a).
Saundersetal,(2012) postulatestherefore anattempttoensure thatqualitative,non-standardizedresearchcould
be replicatedbyotherresearcherswouldnotbe realisticorfeasiblewithoutunderminingthe strengthof thistype of
research.
Marshall and Rossman(2006b) suggestthatresearchersusingaqualitative non-standardized approachneedto
make thisclear-perhapstotransformanaspectperceivedtobe a weaknessbysome intoastrengthbasedon
realisticassumptionsaboutthe abilitytoreplicate researchfindings.

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Thus the traditional criteriaforvalidity,reliabilityandgeneralizationare lessusefulwhenevaluatingqualitative
research(Ali &Yusof,2011).
There are,however,waystoachieve precisioninqualitativeresearch.Firstof all isrationale for
methodologyandverifications,meaningthatthe qualitativemethodisarguablythe most
appropriate wayto addressthe researchproblemandthatthere isconsensusbetweenthe
interpretationsmade andthe meaningsheldbythe interviewees.
Secondly,the researchshould notrelysolelyoninterviews,butalsoonobservationsandanalyses.Thirdly,
descriptionsof the intervieweesshouldbe disclosedaswell asinterview questionsandpractices.
Andfinally, descriptionsof analysisproceduresimprovethe transparencyof the research.Asthe lengthof the field
workhas a substantial weighting,the immersiontothe fieldresearchgivesthe impressionof adeeperknowledge of
the topic(Ali & Yusof,2011).
However,the issue canappearafterthe interviewsaswell,if the resultsare reliabilityof the researchreferstothe
ideathat couldanotherresearcherconductthe same studyandcome to the same conclusions.Inqualitative
researchthisdoesnotapply,since the data isaffectedbysubjectivity.
Similarproblemsrelate togeneralizingthe results.Asopinions are notsolidandare dependentontime,space and
mindset,anyqualitative researchwouldbe hardtore-produce withthe same results.
3.3.3 Validity
Saundersetal (2012) define validityasthe extenttowhichthe researcherhasgainedaccesstoa participant’s
knowledge andexperience andisable toinfermeaningsthatthe participantintendsfromthe language usedbythat
person. Insemi-structuredandindepthinterview ahighlevel of validitymaybe achievedwherethese are
conductedcarefully due tothe scope toclarifyquestions,toprobe meaningsandtobe able to explore responses
and themesfromavarietyof angles.
As statedabove,inqualitative researchvalidityrelatestoactuallycapturingwhatwasinitially
intendedandaccuratelyreportingwhatwasobserved.Inthese terms,thisresearchsucceeded.
The subjectivityof the resultscannot,however,be forgotten.The empiricalresultsreflectthe
opinionsof the case company’sinterviewees.Asanemployee of the company,the researcher’s
objectivitywassomewhataffected,asownconceptionsonthe topicaffectthe pointof view.
The resultscan be consideredreliable,regardlessof the subjectivity.The intervieweesseemed
to answerthe questionsopenlyandfairly.Thus,itcanbe assumedthattheywouldgive the

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same answersagainundersimilarconditions,since the opinionswouldsurelybe differentif the
businesssituationwouldchange orthe company’sbudgetingsystemwouldchange somehow to
one directionoranother.The use of directquotationswastotone downthe researcher’sown
interpretationsof the empirical results.There were noacknowledgedlimitationstothe quality
or quantitiesof the relevantempirical researchdata.
3.3.4 Generalizability
Saundersetal (2012) insists thatthere islikelytobe a concernsurroundingthe generalizabilityof findingsfrom
qualitative researchbasedonthe use of a small and unrepresentative numberof cases. However,twoarguments
have beenadvancedthatseektoclarifyandmodifythe approachoftenadoptedtothe generalizabilityof qualitative
research.
The firstof these relatestothe situationwhere asingle case studyisusedbecause of the unstructurednature of the
research.
Bryman (1988:90) statesthat ‘withina case study a wide range of differentpeople andactivitiesare invariably
examinedsothatthe contrastwith surveysamplesisnot,asacute as it appearsat firstglance. The single case may
infact encompassa numberof settings,where forexample itinvolvesa studyina large organizationwithsites
across the countryor evenaroundthe world.
By contrast,Bryman (1988a) pointsoutthat manyresearchprojectsadoptingasurveystrategyuse samples
restrictedtoone particularlocality. A well-completedandrigorouscase study isthusmore likelytobe useful in
othercontextsthanone that lackssuch rigor.
The secondargumentwiththe approach thatquestionsthe generalizabilityof qualitative researchorcase studyis
relatedtothe significance of thistype of researchtotheoretical propositions(Bryman1988b,Yin 2009)
Where youare able to relate yourresearchprojecttoexistingtheoryyouwillbe inapositiontodemonstrate that
your findingshave abroadertheoreticalsignificance thanthe case or casesthat formthe basisof your work
(Marshall andRossman,2006c). It will clearlybe uptoyouto establishthisrelationshiptoexistingtheoryinorderto
be able to demonstrate the broadersignificance of yourparticularcase studyfindings.

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Saundersetal (2012) contendthatthisrelationshipwillallow yourstudytotestthe applicabilityof existingtheoryto
the setting(s) thatyouare examiningandwhere thisisfoundwantingtosuggestwhy. Itwill alsoallow theoretical
propositionsto be advancedthatcan thenbe testedinanothercontext.
As Bryman(1988c) pointsout,thisalsohas implicationsforthe relationshipbetweentheoryandresearch,since the
identificationof existingtheoryanditsapplicationwillbe necessarybefore the researcherembarksonthe collection
of data.
Basically,generalizingthe resultscouldbe difficult,consideringthatthisresearchwas conductedasa case study.
However,the same issuesconcerningbudgetingoccurinmost companies.Therefore,the resultsstrengthenthe
pointsmade inthe theoretical framework concerningtraditionalbudgeting.Regardingthe alternativemethods,
generalizationisharder, since muchof the empirical findingswere basedonanalysesconductedbythe researcher
and the managementwasonlyaskedaboutissuesrelatingtothemasit wouldhave beenextremely leadingtoask
questionsaboutabudgetingsystemtheyhadneverused.
Relatingtothe precisionof the researchasa signof validityinqualitative research,this researchcouldhave been
done better.If precisionisdeterminedbythree factors,thisresearch coveredtwoof these.Confidentialityissues
preventedfulltransparencyanddisclosure as interviewswere recorded,butthe case companydidnotallowthem
to be disclosedinthe appendixes.
As budgetingisaninternal process,some informationwasdeemedtobe confidentialandcouldnotbe addressedin
thisresearch.It didnothinderthe researchas the researchcouldbe conductedregardless.
However,inseekingtocounterargumentsaboutthe generalizabilityof qualitativeresearchstudiesusingsemi-
structuredor indepthinterviews,itisimportant torecognize thatsuchstudiescannotbe usedtomake statistical
generalizationsaboutanentire population(whateverthismaybe inthe contextof the researchtopic) where your
data are froma small non-probabilitysample.
3.4 Secondary data
The available literature wasusedandinformationandknowledge wasgatheredaboutthe usesof traditional
budgetingand the alternative methodsof budgeting. The pitfallsof thesebudgetingmethodsasappropriate
managementtool are discussedaswell. Bothrecentlypublishedarticles,journalsandtextbooksare used,older
literature isusedaswell.

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3.5 Primary data
Primarydata isinformationthathasbeencollectedforaspecificpurpose andisoftenqualitativedata. The data
receivedfromthe interviewsandobservationof activitiesisprimarydata. Afterthe interviewswere held,the
informationcollectedwaswrittendownandshowntothe participantsforthe purpose of verifyingthe
completenessandaccuracyof the data collected.
3.6 Data analysis
The bestmethodto conducta case studyis to have a general analyticstrategy.There are three analyticstrategies
and these strategiesare basedona) theoretical propositions,b) settingupaframeworkbasedonrival explanations,
and c) developingacase description(Yin,2003,p. 109).
Yin (2003, p.112) describesthe following:“Theoriginalobjectiveand design of thecase study presumably isbased
on propositions,which in turn reflects a set of the research questionsand reviewsof the literature. The Theoretical
propositionsaboutcausalrelations,answersto “how”and “why”questions,can beextremely useful in guiding case
study analysis.” Yin’sdescriptionperfectlyfitswhenthe choice forthe general researchstrategywasexplained.This
concludesthatthe thesiswill be basedonthe strategyof ‘theoretical propositions’.2
Budgetingtoucheseverybase inthe organization;fromstrategytoperformance evaluationandfromdepartments
to employees.Everypartof the organizationcanbe influencedbythe weaknessesinthe budgetingprocessandcan
cause effectsthroughoutthe entire organization.Therefore, the sequential stagesinthe budgetingprocess,i.e.the
dynamiceventsthattake place inthe organization,needtobe investigatedbyusinganorganizational-level logic
model.The use of thislogicmodel will consistof matchingempiricallyobservedeventstotheoreticallypredicted
events(Yin,2003, pp. 127-133).
Qualitative dataanalysisisaverypersonal processwithfew rigidrulesand procedures.Forthispurpose,the
researcherneedstogothrougha processcalled ContentAnalysis.
ContentAnalysismeansanalysisof the contentsof aninterview inordertoidentify the mainthemesthatemerge
fromthe responsesgivenbythe respondent’s .Thisprocessinvolvesanumberof steps:
2The strategy for ‘rival explanations’ is used when several hypotheses are included or when a theoretical proposition is lacking.
Case description is used when having difficulties making either of the approaches work.

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Step 1
Identifythe mainthemes. The researcherneedstocarefullygothroughthe descriptive responsesgivenby
respondentstoeachquestioninordertounderstandthe meaningtheycommunicate.Fromthese responsesthe
researcherdevelops broadthemesthatreflectthese meaningsPeople use differentwordsandlanguage toexpress
themselves.Itisimportantthatresearcherselectwordingof the theme inaway thataccuratelyrepresentsthe
meaningof the responsescategorizedunderatheme.These
themesbecome the basisforanalyzingthe textof unstructuredinterviews.
Step 2.
Assigncodestothe main themes: If the researcherwantstocountthe number of timesatheme hasoccurred inan
interview,he/she needstoselectafewresponses toanopen- endedquestionandidentifythe mainthemes.He/she
continuestoidentifythese themesfromthe same questiontillasaturationpointisreached.Write these themes
and assigna code to each of them,usingnumbersorkeywords.
Step 3.
Classifyresponsesunderthe mainthemes: Havingidentified the themesNextstepistogo throughthe transcriptsof
all the interviewsandclassifythe responsesunderthe differentthemes.
Step 4.
Integrate themesandresponsesintothe textof yourreport: Havingidentifiedresponsesthatfall withindifferent
themes,the nextstepistointegrate intothe textof yourreport.While discussingthe mainthemesthatemerged
fromtheirstudy,some researchersuse verbatimresponsestokeepthe feelof the response.There are otherswho
count howfrequentlyatheme hasoccurred,and thenprovide asample of the responses.Itentirelydependsupon
the way the researcherwantstocommunicate the findingstothe readers.
3.7 Ethical considerationsin the research study:
Collectingdatathroughanyof the methodsmay involve someethical issues inrelationtothe participantsandthe
researcher:
- Those fromwhominformationiscollectedorthose whoare studiedbya researcherbecome participants of the
study. - Anyone whocollectsinformationforaspecificpurpose,adheringtothe
acceptedcode of conduct, isa researcher.
a) Ethical issuesconcerningresearchparticipants:There are manyethical issuesinrelationtoparticipantsof a
researchactivity.

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i) Collectinginformation:
Researchisrequiredtoimprove conditions.Providedanypiece of researchislikely tohelpsocietydirectlyor
indirectly,itisacceptable toaskquestions, if youfirstobtainthe respondents’informedconsent.
If you cannot justifythe relevance of the researchyouare conducting, youare wastingyourrespondents’time,
whichisunethical.
In thisresearchstudy,Igot permissionfromthe directorstocarry outthe researchby convincingthemthatitwill
helpthe companyunderstandbudgetingindetailsandimprove the budgetprocessandoverallorganizational
performance.
ii) Seekingconsent:
In everydisciplineitisconsideredunethical tocollectinformationwithoutthe knowledge of the participant,and
theirexpressedwillingnessandinformedconsent.
Informed consent impliesthatsubjectsare made adequatelyaware of the type of informationyouwantfromthem,
whythe informationisbeingsought,whatpurpose itwillbe putto,how theyare expectedtoparticipate inthe
study,andhow itwill directlyorindirectlyaffectthem.Itisimportantthatthe consentshouldbe voluntary and
withoutpressure of anykind.
In thisresearchstudyall participantswere informedthatthe information,Ineededwasonthe importance of the
oldtraditional budgetingmethodasaplanningandmanagementcontrol tool andtosee how the budgetingprocess
couldbe improvedinthe nearfuture.Ialso toldthemthatthe alternative modernmethodsof budgetingcouldbe
usedinthe future dependingontheirfeasibility.Ialsoinformedthemthatthe participationwasvoluntary
iii) Providingincentives:
Most people donotparticipate ina studybecause of incentives,butbecause they realizethe importance of the
study.
Is itethical to provide incentivestorespondentstoshare informationwithyoubecause
theyare givingtheirtime? Givingapresentbeforedatacollectionisunethical.
In thisresearchstudy,Ididnot give anyof the participantsanyincentivestheyall agreedtoparticipate sothatthe
budgetperformance atthe companycouldbe improved.

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iv) Seekingsensitive information:
Certaintypesof informationcanbe regardedassensitive orconfidential bysome people andthusaninvasionto
theirprivacy,askingforsuchinformationmayupsetor embarrassa respondent.
For mostpeople,questionsondruguse,pilferage,income,age,marital statusetcare intrusive.Incollectingdata
youneedto be careful aboutthe sensitivitiesof your respondents.
It isnot unethical toasksuch questionsprovidedthatyoutell yourrespondentsthe type of informationyouare
goingto ask clearlyandfrankly,andgive themsufficient time todecide if theywanttoparticipate,withoutany
majorinducement.
In thisresearchstudy,all informationaskedforwasinrelationtothe budgetingprocessandthe waythe
participantsfeltaboutthe whole process,theircontributiontoitandsuggestionstoimprove the budget
performance.
v) The possibilityofcausing harm to participant:
Whenyoucollectdata fromrespondentsorinvolve subjectsinanexperiment,you needtoexamine carefully
whethertheirinvolvementislikelytoharmtheminany way. Harm includes aresearchthat mightinclude hazardous
experiments,discomfort, anxiety,harassment,invasionof privacy,ordemeaningordehumanizingprocedures.
If it is likelyto,youmustmake sure thatthe risk isminimal i.e.the extentof harmor discomfortisnotgreaterthat
ordinarilyencounteredindailylife.If the way informationissoughtcreatesanxietyorharassment,youneed totake
stepsto prevent this.
In thisresearchstudy,Iexplainedtothe participantsthatI wascarrying outthisresearchto enhance myresearch
skillsandalsotohelpthe companyto improve onitsbudgetingpracticesandoverall organizationalperformance.I
made sure that the companywas not intendingtoretrenchinganyone orreducingtheirsalariesandwages.
vi) Maintainingconfidentiality:
Sharinginformationaboutarespondentwithothersforpurposesotherthanresearch isunethical.Sometimesyou
needtoidentifyyourstudypopulationtoputyour findingsintocontext.Insuchasituationyouneedtomake sure
that at leastthe informationprovidedbyrespondentsiskeptanonymous.
It isunethical toidentifyanindividual’sresponses.Therefore youneedtoensure that afterthe informationhas
beencollected,the source cannotbe known.
Thisresearchstudywas conductedwiththe conditionthatthe companyname anditsdetailedoperationsremain
anonymousandno individual responseshave been quotedinsteadageneral view hasbeengiven.

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b) Ethical issuesrelatingto the researcher:
i) Avoidingbias:
Biason the part of the researcherisunethical.Biasisa deliberate attempttoeitherto hide whatyouhave foundin
your study,orhighlight somethingdisproportionatelyto itstrue existence.
In thisresearchstudy,Ihave avoidedbiasandreportedthe entire budgetingprocessandbudgetingperformance as
it isinthe companywithoutanyfearor favor.
ii) Provisionor deprivationofa treatment:
Both the provisionanddeprivationof atreatment/interventionmaypose anethical dilemmaforyouasa
researcher.Isitethical toprovide a studypopulationwithan intervention/treatmentthathasnotyetbeen
conclusivelyproveneffective or beneficial?Butif youdonot test,how can youprove or disprove itseffectivenessor
benefits?
There are nosimple answerstothese dilemmas.Ensuringinformedconsent, ‘minimumrisk’andfrankdiscussionas
to the implicationsof participationinthe studywillhelptoresolveethicalissues.
In thisresearchstudy,Iinformedthe participantsthatthe companydiduse the oldtraditional methodof budgeting
and I wasassessingthe effectiveof thismethodincomparisontothe modernmethodsof budgeting likeBalance
Scorecard(BSC),Beyondbudgeting(BB),Rollingbudgeting(RB),Activitybasedbudgeting(ABB) andZero-based
budgeting(ZBB) etc.
iii) Usinginappropriate research methodology:
It isunethical touse a methodor procedure youknow tobe inappropriate e.g. selectingahighlybiasedsample,
usingan invalidinstrumentordrawingwrong conclusions.
In thisresearchstudy,the methodusedwasthe qualitativemethodapproach,itwasmainlycase studythatdidnot
involve quantitative figuresand mainlydescriptive innature
iv) Incorrect reporting:
To reportthe findingsinawaythat changesor slantsthemto serve yourownor someone else’sinterest,is
unethical.

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In thisresearchstudy,all the interviewsandobservationmade were reportedasaccuratelyandcorrectlyaswas
appropriate withoutservinganystakeholdersinterests.
v) Inappropriate use of the information:
The use of informationinaway thatdirectlyor indirectlyadverselyaffectsthe respondentsisunethical.If so,the
study populationneedstobe protected. Sometimesitispossible toharmindividualsinthe processof achieving
benefitsforthe organizations.Anexample wouldbe astudyto examine the feasibilityof restructuringan
organization.Restructuringmaybe beneficial tothe organizationasa
whole butmaybe harmful tosome individuals. Shouldyouaskrespondentsforinformationthatislikelytobe used
againstthem?
It isethical to askquestionsprovidedyoutell respondentsof the potential use of the information,includingthe
possibilityof itbeingusedagainst some of them, andyouletthemdecide if theywanttoparticipate.
In thisresearchstudy,Imade sure thatthe participantsknew thatIwas onlyenhancingmyresearchskillsand
merelyhelpingthe companytounderstandthe entire budgetingprocess bettersoas to eventuallyimprove onthe
budgetperformance.

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Chapter 4: Findings, Analysis andDiscussions
4.0 Introduction
Budgeting process includes key practices to ensure organizations set prioritiesand operational plans, establish
targets and relevant metrics, and create mechanisms to analyze, evaluate and report progress at regular
intervals. It also includes activities to make necessary adjustments and improvements to ensure that the
organization remains pointed in a direction to achieve its results in the most effective and efficientmanner.
Performance measuresbythemselvesdonothing.Itishow youmanage those measuresandputthemintoaction
that makesthe difference. Measurementiscrucial tomanagementcontrol.Organizationalparticipantsfocusonthe
variablesthatgetmeasured.The variablesare derivedfromthe missionandstrategicgoalsintoaplanand
quantifiedforthe budget.Thismethodhelps achieveorganizational goalsatleastannually. Controlsare the
corrective actionsinorderto ‘keepontrack’.It is an evaluationof the realizedperformance versusthe standard.
Therefore,the managementcontrol processisdividedintoseveralphases (de Waal,2004):
Budget performance management can be broken down into the followingsix key elements:
4.1 Strategic Planning:
In annual or semi-annual exercises,an organization sets its overall vision and direction and identifiesstrategies
to achieve long-term results.
4.1.1 Operational Integration:
Tying daily work processes to an organization’s strategic plan to helpit stage its efforts to maximize success.
This practice includes evaluating an organization’s strengths and constraints, key processes and available
resources to ensure the organization is best positionedto execute the activities necessary to deliver its desire d
results.
4.1.2 Performance Measures:
Performance measures are tied directly to strategic planning and operational integration activities. The practice
of identifyingand buildingperformance measures enablesan organization to gauge its progress towards its
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4.1.3 Progress Evaluation:
This practice consists of reviews,at predefinedintervals, to consider new and emerging issues or
opportunities, and consider changes, adjustments and priorities to an organization’s overall plan.
Progress evaluation provides an opportunity to reflect on and discover vital course adjustments and
corrections to ensure that an organization does not drift away from its desired results.
4.1.4 Reporting:
This practice involvessharing information on an organization’s progress in achieving its results. It
can help build and maintain confidence of the organization’s stakeholders.
4.1.5 Analysis and Continuous Improvement:
An organization regularly analyzes its progress in achieving its results and makes adjustments and
course corrections as needed.
These key practices are interdependentactivities that, when used in concert, yieldpowerful results.
Strategicplanningisthe implementationof the organizationalmission,objectivesandthe achievability
of the strategy.The implementationgivesabetter understandingof 1) the marketposition,2) the
strengthsandweaknesses(internal environment) aswell asthe opportunitiesandthreats(external
environment) and3) howthe company shouldactin the industry.
The strategyprovidesaway to exploitthe strengthsandopportunities,andtranslatesthe vision
for managersintoa subsetof tactics whichare executedthroughoutthe organization.The subsetof
tactics have manybehavioural aspectssuchasthe discussingthe future andthe commitmentof
attainingthe performance targets. Therefore,the strategycanbe usedto assessthe organizational
success,failure,progressandsuggestcorrectiveaction
In myown opinionthe budgetis anappropriate managementcontrol tool;itimplementsthe strategic
planand itfunctionsasa predetermined‘contract’inorderto evaluate the realizedperformance.Thus,
the budgetplans andcontrolsthe wayorganizational resourcesare allocated forthe whole year,
because the realizedperformance isevaluatedagainstthe budgettargetssetanddecisionsare made to
execute the budget. The organizational participants are rewardedif they have performedbetterthan
the ‘contract’ (i.e.,targets) orthey are punished,whenthe budgetedset targetsare notachieveddue to
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Though,the industryevolvescontinuously.Fierce competition,governmental orthirdparty
pressure onregulations,corporate governance andspecialisationanddifferentiationof customerneeds
induceschange.Strategicchoicesneedtobe adaptedandwhichhasa great effectonthe organization.
Managers can undertake actionsthatare not inline withthe budgetdue tothese differentiating
circumstances.The budgetcanbecome unusable andistherefore notsacred. The managerial influence
can leadto actionsand decisionsthatare notin line withthe organization’sgoalsandconsequently,
managersuse control mechanismstokeepontrack. It isan ongoingprocesstoguide the organizationby
providingcontrol forthe tensionsthatarise in the dynamicsof creatingvalue,strategymakingand
humanbehavior.
Figure30: The budgetperformance cycle
Thischapter will lookatthe phasesandpredominantlyfocuson the budgetingapproachusedinCase
studyA. Itwill elaborate onthe effectsof the oldtraditionalbudgetingtechniqueandcriticallyassess
the suitabilityof thistool asa planningandmanagementcontrol tool

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4.2 Top down approach budgetingprocess
The top-downapproach of budgetingatCase StudyA meansthat the uppermanagementcompletesthe
budgetingprocesswithminimal involvementfromthe managementof individual operatingunitsor
departments. The levelsbeneathheadquarterslevel receive the budgetamounts“from the top”and
theyare expectedtoadhere tothese givenamounts. Individual operatingunitshave verylittle,if any,
inputintothe determinationof the budgetamounts.
The top-downisusuallyusedbecause the middlemanagementisalwaysnew due tothe highturnover
of staff consequentlywouldnotknowthe operationswell.Alsothe middle managementisusuallynot
aware of all the anticipatedchangesanddevelopmentsthatwill occurwithinthe company.
It isa middle sizedcompanyandthusthe middle managementhaslittleinformationtocontribute tothe
budgetingprocess,the communicationandcoordinationof activitieswithinthe companyisverypoor
and feedbackisrarelygivenbacktothe lowermanagementlevels. The lowerandmiddlemanagement
levelsare usuallyverybusy doingtheirroutine dutiesbymakingsure thatcustomers’ordersare
processedintime andinaccordance to the setstandards and normallywouldhave notime tocreate a
budget. Alsothe companybeingalocal one does not possessthe toolsandknow how that wouldallow
easyconsolidationandreviewof budgetsfrommultiple businessunits.
4.2.1 Advantages of top-downapproach of budgeting:
There islessadministrationandtime neededtocomplete the budget
It facilitatesthe executive managementtoincorporate theiroverall strategicplansintothe budgetand
inclusionof corporate interdependencies.
4.2.2 Disadvantages of top-downapproach of budgeting:
There are usuallyemployee motivationproblems atthe lowermanagementasthe budgettargetsare
imposedonthemwithouthavingmuchof theirinputs.
The lowermanagementalsofindsthataccessinginformationfromthe executive managementisdifficult
and at timesthe budgettargetsare not communicatedwelltothese lowerlevelsof management asa
resultthere isincreasedbudgetdiscrepancyandlessrelevantvariance analyses.

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4.3 Budget performance
In Case StudyA,there is verylittle participationbythe low andmiddle level managementinbudget
setting. Thishadledto dismal budgetperformanceprimarilybecause of tworeasons:
Firstlysince the lowermanagementsare notinvolvedinthe budgetsetting,there isatendencyof
informationasymmetryinthe company,the executivemanagementdid nothave insightintolowerlevel
manager’swaysof operationsandtheirspecializedknowledgewasoftenoverlookedconsequently
there waspoor communicationandcoordinationof activitieswhichledtopoorbudgetperformance.
Alsolackof participationbylowerlevel managementleadstoalowercommitmenttocarryout the
budgetand“meetthe budget”. Planningisaprocessthat can be usedforplanningandgoal setting
whenthere isenvironmental uncertainty,formotivatingsubordinateswhenthere istaskuncertainty
and forcoordinatingactivitiesbetweeninterdependence unitsordepartments.
But on the otherhand lackof participationwasadvantageoustothe companyas lowerlevel
managementwere notable tomanipulate the standardsdemandedonthem orrather use the
opportunitygivenbyparticipationtoreduce the standardsdemandedof themandto biasthe estimates
theysubmit.
In case study A, scenario, lackof participationhasledto dysfunctional behaviorlike gamingandgoal in
congruencywhere employeespursuedtheirownselfishgoalsatthe expense of overall organizational
goals. Thisfindings corresponded with(Argyris,1952,28) claimthat participationisthe mainsolutionto
the dysfunctional effectsof budgeting.
The incremental approachusedatCase studyA, disconnectsthe budgetfromthe company’sstrategy,
since budgetedfiguresare derivedfromthe previousyear’scorrespondingonesandthusare not
basedon the strategy(Bunce etal,1995).
In addition,the incremental approach createsproblemswith expenses.If the budgetisbasedon
previousyear’sfigures,the managersmightfeel the needto spendthisyear’sbudgettosecure the
same amountof moneyfornextfiscal yeartoo(Libby& Lindsay,2003a).

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In myown opinion,old traditional budgetingisthe mostappropriate managementplanningandcontrol
tool,as companies’worldwide use the budgettoencourage strategicallyalignedbehavior. The only
issue isthatin the Case StudyA, the financial issue isgivenpreferenceover the internal processesinthe
organizationmeaningthatbeneficial processes are foregone hence the not maximizing the
shareholdervalue.
Unpredictabilityinthe markethasincreasedasnew marketandproduct developmentsappearfaster
and customerloyaltyisdiminishesmakingthe old traditional budgetinganappropriate planningand
managementcontrol tool.
In case studyA they viewthe financiallyorientedtasksof budgetingas the mostimportantfunctions
and those tasksare the mainreasons why the oldtraditional budgeting methodisused.
The financial aspectshighlightthatthe companycan be able to repayback itsloansand bankoverdrafts
and alsocontrol itscosts and manage itscapital expenditure andworkingcapital requirements. Since
budgetsare infinancial figures,the emphasis easilyfocusesoncostreductionwhereasthe criticsfocus
wouldemphasizemore onvalue creation, maximizingshareholdervalue.(Hansenetal.2003)
The non-financial aspectsare notseenasimportant, like customeraftercare,innovationandlearning
perspective of the organizationandthussometimesgoodaccountsare lost,innovationandbetterways
of carryingoperationsare largelyignoredanddiscountofferedbysome suppliersforfeited. Thisfinding
issomewhatinagreementwithKaplanandNorton(1996) conclusionsonthe use of the Balance Score
card.
The lowerlevel managementinmostcase are not able to create budgetslacksas theydo not setthe
budgettargets. Budgetslack meansthat a managerdeliberatelyunderestimatesrevenue turnoveror
overestimatescosts, makingiteasiertoachieve the overall budgetedobjectives(Hansen&Mowen,
1994). Thisisusuallyseenasthe mostprevailingexampleof dysfunctionalbehavior.
Managers whoare usuallyunable toachieve theirobjectivessufferalossin credibility,whichcan leads
to harmful effectsonthe person’scareerandbonuses.Also, consistentlyunderachievingmanageris
usuallyputundertightercontrol andthe possibilityof topmanagementinterferingincreases,whichany
managerwouldtryto avoid and thisfindingsisconsistentwith (Merchant&Manzoni,1989) literature.

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4.3.1 Budget as a fixedcontract:
In case studyA, moneyisallocatedtovarious departments overaperiodof one yearand is rarely
reviewed. Forinstance the budgetforSalesandmarketingdepartment,thissometimesledtothe sales
representative toadvertiseunnecessarysoasto use upthat budgetand notlose inthe followingyear
eventhoughinthe advertisementwereusuallyaneffortinfutility.
Libbyand Lindsay(2003) state thatwhenhavingthe budgetas a fixedcontract,organizationstendto
spendthe remainingpartof the budgetinthe endof the year,even if notnecessarybecause theydo
not wantto receive lessmoneynextyear. Thiscorrespondswiththe findingsinCase studyA whereby
employeesbelievethatthe moneyspentthe previousyeardeterminesthe amountof moneyavailable
nextyear.
4.3.2 Performance evaluation:
In Case studyA,the mainpurposesforbudgetingisthatitisused mainlyasa performance evaluator
and as a cost cuttingmeasure. Sometimesemployeesconcentrate somuchonmeetingshorttermgoals
like monthlycashrevenue targetsthanachievinglongerterm contractswhichare to be creditmeaning
the salesrepresentative willnotgettheircommissions.
Cost reductionstrategiesare adoptedinordertoachieve the currenttargets. Action,suchas cancelling
and delayingvalueaddingprojectsiscommonandin the longrun,the financial consequencesof this
can be detrimentaltothe organization.
These findings verifythe statementthatactivities,whichare aimedtosupportlongtermstrategies,are
cancelledinordertomeetthe annuallybudgettargets(Libby&Lindsay,2003).
The budgetcan create a gap betweenshorttermgoalsandlongtermstrategies;theyalsostate that
whenusingthe budgetforperformance evaluation,the conditionsandcircumstancesmustbe stable in
orderto be capable toset realistictargets.(Hansenetal,2003). This doesnotcorrespondtocase study
A whichmainlyaims reduce costsandthe budgetisusedfor evaluationof performance of the
employeeswhilstthe environmentconditionsare constantly changing.
In myown opinionthe executive managementshould notsettooeasyto achieve budgettargetsthatis
if the targets are not settoo ambitious,thenthe budgetdoesnotoverestimate earnings. Inmostcases,
spendingisatleastinsome waysbasedon the revenue projectionssobudgetingslackcouldreduce
spending. Also,althoughdifficultobjectiveswouldmotivate peopletoachieve them, theycanalso

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reduce the level of commitment,if the managersdonotthinktheyare realisticallyachievableinthe first
place. Lowerbudgettargetswouldrequire lesscontrol analysis.Therefore itseemsthatinCase StudyA
scenario,thatoverlyambitioustargetscouldbe more harmful forthe companythanrealisticorsand-
baggedobjectivesthisfindingisalsoinagreementwithMerchantandManzoni,1989 findings.
4.3.2.1 Time Consuming:
In Case StudyA the budgetprocessis not only tootime-consumingbecauseall the costsforprocessing
the servicesdeliveredbythe companyhave tobe compiledandlaterreportedon butalsothe top
executivehave toconveyboardmeetingsbefore anybudgetallocationscanbe agreeduponby the
directors. The strategyplanis dividedintobothfunctional andindividual goals,whichdemandmuch
time. These findingscorrespondtoHope andFraser(2003) and Hansenel al (2003) findingsthataccuse
the budgetforbeingtootime consumingandexpensive due tothe time spentonbudgetnegotiations.
4.3.2.2 Planningand Forecasting:
The budgetsystemisaccusedof beinginflexible (Wallander,1999) and that itpreventsorganization
fromadoptionto changes(Hansenel al,2003). Case studyA findingscontradictthe literature.
Dependingonthe certaincircumstancesandfunctions,individualscanaskforadditional money
allocationsbymakingappropriate proposalsfortheirprojectsornew machinerytobe boughtor leased
out inorderto facilitate the deliveryof the services.
If a suggestionisaccepted,supplementaryresourcesare providedforbythe executive management.
Althoughit’sacumbersome processandusuallyraisesanumberof questionsbefore anyadditional
resourcesare needed,the budgetinthisscenarioallows changeswhichare value addingandenhance
the financial positionof the company.
Furthermore,the budgetisaccusedof beinganunnecessaryevilbecause ittendstoforecastanongoing
trend(Wallander,1999b),thisis notin line withthe findingsinCase StudyA as the topdownapproach
of budgetingprocessisusedandtheycanforesee adisruptionintrendbeforehand. Market
environmentandotherenvironmentalfactorsare analyzedatthe executivemanagementlevelwhilst
employeesatthe operational levelseemcontendedonforecastinganongoingtrend

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4.4 Uncertainand Competitive environment:
Hope and Fraser(2003) state thattoday’senvironmentchangesrapidlyandtherefore the budgetsdono
longerprovide managerswithsufficientinformation. The statementispartlyapplicable toCase StudyA.
The role of the budgethaschangedand frequentlyupdatedforecastsare neededdue tothe constantly
changingenvironment. However,the rollingbudgetsoractivitybasedbudgetingare more time
consumingthanthe traditional budgetingmethodhence thesealternativemethods are notused.
Case studyA isa centralized decisionmakingformostoperationsinthe organizatione.g.financial
planningandotheradministrative andsupportfunctionsthisthusenhancesfastadoptionstochanges.
4.4.1 Budgets are rarely strategicallyfocusedand oftencontradictory.
The budgetismainlyseton revenue targetsandforcost control purposes.There is usually nodetailed
planon howto achieve the profitability(i.e.,viarevenuegrowthand/orcostcontrol).Hence,the scope
ismainlyfocusedonthe comingyear.
Thisis mainlydue tothe importance of the currentyear revenue andprofits.The myopicviewcreates
an imbalance towardsthe longertermbusinesshealth.The corrective actionstoenhance the shortterm
goalsare verytime-consumingwhichleavesinsufficienttime forthe organizationtocreate longerterm
opportunities.

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Chapter 5: Conclusions, Recommendationsand further Research
5.0 Introduction
At case studyA, itis evidentthatthe traditional budgetingtechnique isstill usedasthe main
managementcontrol tool,itisusedforassessingthe organizational performance andwhetherits
meetingthe demandsof the competitiveenvironment. Case StudyA’sproblemsrelate tothe
ineffectivenessof the budgetandthe lackof a goodperformance culture.Marshusesthe budgetasthe
maincontrol mechanismandas the performance evaluator.A numberof problemshave beenidentified
that have ledto unattainable budgetandanineffectiveperformance culture:
 The realisticestimationof renewalrevenue wasinsufficientaccordingtothe senior
managementandwastherefore compensatedinnew andexpandedbusinesstoshow growth;
 Insufficientbudgetaryparticipationof the Executive Committee;
 Insufficientcommunicationbetweensales/accountmanagersandbrokersresultedthat
available informationwasmissedthatcouldhelpdetermine budgetedrevenue.Thishasledto
too muchopportunisticbehaviourinthe budgetedrevenue;
 Undisciplinedbehaviourhadledtothe fact that hardlyanyone wantto feel accountable forthe
achievedresults.Still,everybodythinkthattheyperformedwell andtherefore contributedto
the organization;
 The complexityof the systemhasledtounreliable data;
The scope of these problemsdoesnotonlyentailthe budgetaryprocess.Itdoesgive anoverview of
impedimentsinthe organizationwhichhasinfluencedbehaviourinthe budgetaryprocess
 A wide range of problemshave beenpinpointedinthiscase studyA,that have ledto
unattainable budgetand a feelingthat perhapsthe budgetisnotthe ultimate management
control tool, as it has ledto an ineffective performanceculture andspiralingoutof
managementcontrol costs. Highturnoverof staff have made budgeting process less
ineffective due to loss of knowledge and job skills.

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5.1 Some ofthe criticismsof the current budgetingsystemas a managementcontrol tool identified
are:
In sufficientbudgetaryparticipation,the budgetaryprocessatcase studyA ismainlya top down
approach wherebythe executive managementsetsupthe budgetperformance targetsandsimply
imposesthemonthe subordinate staff.
There isgoal incongruencywithindividualsworkingtomeettheirownselfishgoalsandneedswithout
aligningthemtothe overall organizational objectivesandgoals,hence thereisinefficientallocationof
companyresources.
Pressure fromthe banksandother financial institutions have made the companytochoose the budget
constrainedstyle of budgetingwhichapparentlyledmore staff inengagingindysfunctional behaviors
such as myopicdecisionmakingwhere shorttermgoalsare givenpreference overlongtermgoals,
budgetinggamesandpaddingare alsoverycommon.
Lack of frequentcommunicationandcoordinationof activitiesamongthe participantsinthe budgeting
processhave made the budgetedfigurestoappearunrealisticandunachievable.
Frequentstaff turnoverhasledtoa gap inknowledge inthe budgetingprocess,andnew budgeting
processbeingimplementednowandthenwhichmakesthe companylackfocusinachievingthe
corporate strategy.
The budgetismainlyassessedusingthe financial indicatorswhile the non-financial indicatorslike
customerstrategy,loyaltyare normallyignored,the learningof the organizational processesbythe
participantsisnormallyconsideredanunnecessaryexpense andisthusavoided.
The budgetingprocessisusuallytootime consuming,the budgetaryparticipantare usuallyengagedin
theirdayto day operationandhardlyhave time toimplementthe budgetprocessletalone evaluating
itseffective asmanagementcontrol tool. The problemsthatarise are usuallysolvedwithoutthe input
on the budgetparticipantsbutratheron an adhocbasis.
The budgetismainlybasedonlastfinancial yearfiguresandgenerallyincremental innature,the
budgetisnormallystaticandas a managementcontrol tool isineffectiveinpredictingthe prevailing
marketconditionsexperiencedinthe organization. Therefore theyare manyopportunitiesthatthe
companyforegoesasa result.
In spite of the manycriticismsthathave beenmade byacademiciansandotherresearchers,budgeting
theoryisstill veryuseful inaddressingparticularproblemsrelatedtocompanyoperationsandatthe
same time providingadequatesolutionsrelatedtothe entire budgetingprocessesandsystems.

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Althoughtraditionalbudgetinghaschangedoverthe lastfew years, thischange hasbeenneither
dramaticnor radical. Instead,we have witnessedincremental improvements,withtraditionalbudgets
beingsupplementedbynewtoolsand techniques. Budgetingisevolving,ratherthanbecoming
obsolete. Traditional budgetingistherefore notdeadortotallyobsolete,since itisstill beingusedin
the majorityof companiesaroundthe world.
However,businessenvironmentconditionsare nolongerthe same andbudgetingsystemsneedto
become more responsivetothe needsof customersandrequirementssetbycompetition. Companies
wouldneedtocustomize internalsystems,includingplanningandcontrol, toaccommodate company
requirementsand competenciesthateachcompanyfacesi.e.toachieve fitbetweenexternal
environmentandinternal systems.
Whetherthatwill be achievedbythe installationof rollingbudgetsandforecastsorof the balanced
scorecardor anyothermethodof betterbudgetingtechniques,dependsonhow the companyviewsthe
traditional budgetingandhowitsuitsitsownoperationsandactivities. Those companiesthatoperate
ina turbulentenvironmentandthushave tokeepimprovingtheiroperationscango a stepfurtherand
implementone of the beyondbudgetingmodels, whichessentially have nobudgetstoplanandcontrol
theiractivities.

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Figure 31: Breaking the budgetat Borealis-the fourpillarsof the budget-lessorganization
5.2 Budgetingat Borealiscompany
The above case of Borealisisan example of the bestimplementedbeyondbudgetingmodel sofar,
whichcame close to the ideal planningandmanagementcontrol tool asadvocatedbyBBRT. Borealis
abandoneditsoldtraditional budgetingsystemin1995, the keywas a decisiontoseparate performance
managementandfinancial planningsystemsand install asetof new planningandmanagementcontrol
toolsas illustratedbelow:

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Figure 32: Separating performance managementfrom financial reporting:
Source: Boesen,2001 p. 10
However,despite havingnobudgetstoguide the company’soperationsandactivities,financial plans
and forecastswill alwaysbe used. Forecastinghasbecome an importanttool tomanage the
continuously changingenvironment. Ithasbeennotedthatthere is alsoa shiftfromthe top-down,
centralizedprocess toamore participative,bottom-upexercise inmanycompanies. It’s evidentthat
activitiessuchasplanning,forecasting,coordinatingandcontrollinginbusinessentitiesare still
mandatory.
5.3 Recommendations
In myown opinion,it’sthe waybudgetsare preparedthatneedsadjustments. Forinstance,insteadof
increasingthe previousyearbudgetbya certainpercentage everyyearandthenusingthatbudgetto
evaluate performanceof employeesorplancashallocationstovariousdepartments,budgetsshouldbe

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flexible anddone continuously,updatedpossiblyeveryquarteranditsparamountthat theirfinancial
targetsare linkedwiththe longtermstrategyof the companyin question. Thiswill undoubtedly
eliminatedysfunctional behaviorslike budgetpaddingandbudgetgamestoperhapsacceptable levels.
Budgetsshouldalsonotbe usedas the ultimate managementcontrol tools. Theyshouldnotbe usedto
evaluate performanceof employeesinsteadasetof financial andnon-financial indicatorsshouldbe
usedforperformance evaluationandcontrol purposes. The keyperformanceindicatorsmustbe based
on benchmarkedresultsof majorcompetitorsandexpectationsof ownersandshareholdersandnoton
the assumptionsandtargetsthat the managementsetover12 monthspriorto the real numbers
emerging.
Generally,the budgetingprocesswithinacompanycompelseveryonetogetimmersedinthe company
activitiesandworktowardsachievingthe overall organizational goalswhile takingintoaccountexternal
factors thatinfluence the future performanceof abusiness. It’salsothe onlymainprocessthat
quantities the company’svision,missionandstrategicplansmakingthemoperationalandthusrealistic
and attainable.
Eventuallywhenteamworkisembracedbymostorganizationsandall participantsinthe budgeting
processrealize itsimportance toacompany’ssuccessthanthe actual figuresontheirown,thenbudgets
and theirassociatedbenefitswillbe realized. The participant’srole shouldbe toeducate otherpartsof
the organizationaboutwhatvalue-creatingdecisionsare – and how theyare notnecessarily the same as
profit-makingones. Theyalsoneedtosupplythe informationand analysisrequiredtosupportthese
decisions. Inthe end,goodbudgetingcomesdownto trust,integrityandtransparency.
As always,insteadof followingthe consultants’oracademics’advice bythe book,companiespickand
choose accordingto theirindividual circumstances.
There isa real opportunityforfinance to raise itsgame inthisarea and become more of a business
partnerby encouraging understandingof budgetsacrossthe organization. There wasnoconsensus
aboutwhetherthe finance functionshouldown orsimplyfacilitate the budgetingprocess.

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5.3 Recommendations
I did,however,identifysome underlyingprinciples quite commontosome companies
These are nottoolsor techniquesassuch – rather,theyseemtorepresent amore general philosophy
and a new approachto budgetingbyleadingcompanies, which:
Have an external focus – whatmattersat the endof the dayis theirperformance againstcompetitors,
not theirresultsagainstanalreadyout-of-date budget.The targetsare linkedtoexternal benchmarks,
not pastperformance,andthe incentivesare deliberatelyseparatedfrombudgets.Thisservesto
eliminatesome of the gamingthatblightsthe traditional budgetingprocess;
Are explicitlyfocusedonstrategy – they know thatbetterfinancial performance ultimatelycomesfrom
havingand maintainingcompetitive advantage inthe market place,notfrombetterfinancial
managementinitself.Thisstrategicorientation meansthatleadingcompaniesfrequently use strategy-
relatedscorecards designedtomeasure more thanjustthe financial targets;
InvestinIT systemswhichgenerate acommon setof numbersthroughoutthe company
– veryoftenthisisnotthe case and time iswastedtryingtoreconcile numbersor getdata from
different,oftenincompatible,applications.Creatingasingle vieweradicatesthe unnecessaryduplication
of effort;
Use explicitforecastingmodels,separate from theirfinancial managementsystems –the assumptions
underlyingthose modelsare made clearat everystepof the way.This meanstheycan be changedin
response toenvironmental triggerstoproduce anew, equallyaccurate forecast.A companyis afforded
a higherlevel of speedandflexibility; and
Empowerstaff andmanagersto have freedomandopportunitytoact usingtheirowndiscretionwhere
the environmentconditionschange drasticallyandthe budgetactsas an appropriate management
control tool.

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Accountabilityfordynamicoutcomesshouldbe enhancedwherethe budgetparticipantsachieve
competitiveresultsandnotforachievingpre-settargetsforadepartmentorfunction.
Put theireffortsintomanagingfuture results,notexplainingpastperformance –they realize that
endlessscrutinyof pastresults addslittlevalue.Instead,theytrytoforecast variancesbefore theyoccur
and focus on takingactions that reallydodrive value.Manyof those actionswill be nonfinancial, which
highlightsthe limitations of traditional budgeting.
Communicationandcoordinationof activitieswithinthe organizationshouldbe facilitatedthrough
regularnotice boardsand meetingssothateveryone knowstheirresponsibilitytowardsachievingthe
budgetedfigures.
It shouldbe mandatorythatthe budgetingprocessfordifferentdepartmentsare conductedina
workshopsothat participationof all the staff isensuredandall the participantsinthe budgetingprocess
shouldsignthe agreeduponbudgettargets. Thisdocumentationshouldbe usedasproof fortheir
participation andwillingnesstoachievethe organizational goals. These changesshouldalsobe included
inthe company’sbudgetingguidelinesorpolicy.
Evenwhenall the above elementsare present, the researcherspointoutthatreal change will be
unachievablewithoutahighdegree of trust.Underthe oldbudgetingsystem,control wasexercisedby
businessunitsanddivisions reportingtheiractual performance andvariances andthe headoffice used
thisinformation topredictyear-endresults.
By contrast,leadingcompaniesnowtrusttheirmanagers totell themwhattheywill achieve.
The budgetsshouldalso notbe usedfor personal level evaluationssince budgetscontainseveral costs
and circumstancestowhichthe managerhas no control overand itwouldbe unfairto evaluate
performance withoutremovingsuchissues,inessence the lowermanagementshouldbe evaluatedon
onlythe costs andrevenue thattheyhave control over.

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In orderto improve the budgetingprocessanditsadministration,Case StudyA couldadoptthe
followingaspectsof budgetadministration:
(Harper,1995:322) opine the following budgetingadministration
(a) BudgetCommittee
Budgetsshouldbe setbymanagerssince onlytheydecide whatkindof productsorserviceswill sell,
whatresourceswill be necessarytocreate these productsorservices,andwhat pricesshouldbe
obtainedfrom them. Inaddition,budgetinginvolvesconsiderablemanagement,coordinationfromall
parts of the enterpriseandforthisit isessential thatabudgetcommittee be setupwithrepresentative
fromall departments. The taskof the budgetcommittee istoorganize andsupervisethe preparation
and administrationof acompany’sbudget.
(b) BudgetOfficer:
In additiontothe committee,abudgetofficershouldalsobe appointed. His/herworkisessentiallythat
of secretarytothe committee. Tasksthata budget officerusuallyperformsare:ensuringthatthe
committee’ssecretarial workiscarriedoutandthat instructionsare passedonthe appropriate people,
collectingdataandopinionsfromall overthe company,keepingmanagerstothe budgettimetable and
briefingthe committee members.
(c) Budgettimetable:
Major budgetsare made up of smaller,butkeybudgets. If these smallerbudgetsare notcompletedon
time,the preparationof the majorbudgetswill be heldup,whichinturnwill cause late finalizationof
the masterbudgetand itsultimate approval. Since delayinapprovingthe masterbudgetcanhave
seriousrepercussions,itisnecessarytoprepare a carefully thoughtouttimetable forall budget
activitiesandavoidthissituation. Adherence tosucha timetable mustbe strictlyenforcedforthe
systemtowork.

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(d) Budgetmanual
To assisteveryone whoisengagedinbudgetingandbudgetadministration,abudgetmanual shouldbe
issued. The budgetmanual doesnotcontainthe actual budgetsforthe period, itismore of an
instructionandinformationmanual onthe way,budgetingoperatesinaparticularorganizationandthe
reasonsforhavingbudgets. Itusuallycontainssample formsandrecordstobe usedin the budgeting
process,a listof accountingand control procedures,organizational structure andresponsibilities,a
detaileddescriptionof the processandsoon.
Finally,althoughthe researchasa whole is critical of the budgetingprocess,the project doesnot
amountto a call to abandonbudgets altogether. Instead,ithighlightsthe level of improvementthatcan
be achievedevenwith relativelysimple modificationsandagreat deal of trust.
In myown opinionthe recommendationstoimprove the traditional budgetingasa planningandcontrol
tool is illustrated inthe belowdrawndiagram.
Figure 33, The principlesofbeyondbudgeting
Source: Adaptedfrom Hope and Fraser, 2003 pp70

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5.4 The ‘beyondbudgeting’ journey towards adaptive management
Dr PeterBunce,directorof the BeyondBudgeting RoundTable (BBRT), Europe,outlinedthe reasonsfor
lookingfurtherthantraditional methodsof performance measurementand management.
The BeyondBudgetingRoundTable (BBRT) isat the centre of a movementtohelp organizations
continuouslyimprove theirperformance inabusinessenvironmentthat ismarketled,highly
competitiveandunpredictable, andinwhichintellectual capital is the keystrategicresource.Ithasbeen
inexistence since 1998 withitsoriginsinthe UK, butit now has manymembersfromthe rest
of Europe,the US and Australia.
The BBRT isthe combinationof anewconcept (‘beyondbudgeting’) andacommunity (‘roundtable’).
The BBRT communityisan independentresearchcollaborative that sharesitsknowledge acrossits
global network throughconferencesandworkshops.
The BBRT starts off withthe same catalogue of complaintsaboutthe failuresof budgeting assome of
the otherstudies – itis tootime-consuming,tooexpensive andcompletely outof tune withthe needsof
today’smanagers.Because itcontainsa mix of fixedtargetsandfinancial incentives,it drivespeopleto
behave inwaysthatmay be at oddswiththe needsof the organization.
The BBRT alsowarnsthat budgetsare a ‘relicfroman earlierera’.The problems they cause will be
particularlyacute in companiesthatare tryingto move away from the commandand control culture
and become more flexible.Inaway,the budgetingprocessactsas a protective shieldblockingany
attemptto change.
The BBRT maintainsthat‘betterbudgeting’ isnotananswer– itmerelyspeedsupthe budgeting
as some of the otherstudies –it istoo time-consuming,tooexpensive andcompletely outof tune with
the needsof today’smanagers.Because itcontainsamix of fixedtargetsandfinancial incentives,it
drivespeople tobehave inwaysthatmay be at odds withthe needsof the organization.
The BBRT alsowarnsthat budgetsare a ‘relicfroman earlierera’.The problems theycause will be
particularlyacute in companiesthatare trying to move away from the commandand control culture
and become more flexible.Inaway,the budgetingprocessactsas a protective shieldblockingany
attemptto change.
The BBRT maintainsthat‘betterbudgeting’ isnotananswer– itmerelyspeedsupthe currentflawed
processand perpetuatesthe ‘fixedperformance contract’andcentralized control.

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The BBRT solutionisradical – the onlyway the inherentcontradictionsof the budgeting processcanbe
resolvedisbyscrappingit altogether.Itgoesonto cite a numberof companiesthathave ‘brokenfree
fromthe shacklesof budgetinganditsculture of gaming andmisinformation’.
Theyno longerproduce anannual detailedplandetermining the allocationof resourcesorwhatthe
businessunitsneedtomake or sell.Neitherdotheyuse sucha planforperformance evaluationand
rewards.Theyhave abandoned the fixedperformance contract, where individualincentivesare based
on the achievementof fixedtargets.
BBRT researchintothese companieshas resulted intwosetsof principlesthatdefine adaptive
performance management(see box,right).The firstsix ‘process’principles supportadaptive
managementprocesses thatenableenterprisestobe more responsive totheircompetitiveenvironment
and customerneeds.The secondsix ‘leadership’ principlessupportgreaterdevolutionof responsibility
to teamsaccountable forimprovingcustomeroutcomesrelative to peersandcompetitors.
The organizations thathave ‘gone beyond budgeting’have animplicitperformance contractwith
rewardsgivenwithhindsight basedonrelativemeasures(comparedtothe competitionandthe market)
rather thanfixedtargets.Thisrelativeimprovementcontract isunderpinnedbythe six keyadaptive
processprinciples.
The practical implementationof these principles effectivelyleadstothe transferof responsibilityfrom
the centre to individualbusinessunits.The aimistoenable and encourage local decisions,where
employees are free tobothmake mistakesandfind solutions.
For such devolutionof responsibilityto work,there needstobe a great deal of trust at all levelsof the
organization. Thisisnotdissimilartothe notionof trustflaggedby the CranfieldUniversityresearch.
But BBRT maintainsthattrust and the resulting empowerment–where staffsare free toexercise
discretion –are not possible withbudgets still inplace,because the entiresystem perpetuatescentral
commandand control.
Many companiesthathave gone ‘beyondbudgeting’ use rollingforecastsinadditiontoperformance
contracts. The forecastiscreated everyfew monthsandrollsbeyondthe yearend, sodiffersfroma
budgetinthat itdoesn’t impose afixed‘finishline’atthe endof a fiscal year.
It is basedona fewkeyvariables(or ‘keyperformance indicators’) thatcanbe compiled quicklyand
accurately,resultinginamore flexibleandtimelyforecast.

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Targetsand goalsare not embeddedinsuch arollingforecast.The forecastshowswhat will happen,
basedon certainfactsand assumptions.Managementthenhastocompare this tothe targetsand goals
to ascertainthe gaps anddetermine how these are tobe managed.
BBRT is keentostressthat going‘beyondbudgeting’ isnotaboutnew ‘tools’or‘techniques’.
It isa managementphilosophybased onasetof principlesdevelopedfromreal casesleadingto
adaptive performance management.
The toolsalreadyexist –e.g.,balancedscorecards,rollingforecasts,customerrelationship
management,benchmarking,shareholder value models,enterprisewide informationsystems
and activitybasedmanagementamongst others.Butbyand large,theyhave failedto deliverontheir
promisesbecause the underlying processeshaven’tbeenchangedtoaccommodate them.
The potential of those modelshas,ineffect, been‘neutralizedbythe powerfulantibodies of the
budgetingimmunesystem.Budgeting, perhapsmore thananyotherprocess, definesthe cultural norms
inside anorganization.’
There isno simple recipe toimplement ‘beyondbudgeting’.The stepschosenwill dependon each
company’sculture,structure, history,ITinfrastructure andsoon.
But there are lessonstobe learntfromthe pioneers.Inmanycases,itissimplyabout managingchange
– buildingandsellingacase andcreatinga sharedvisionforthe future.

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In myown opinionthe implementationof beyondbudgetingwouldcompletely transformthe case
company’s A budgetingprocess. The question,however,ishow realisticwouldthisconceptbe forthe
company. Beyondbudgetingadvocatesformore co-ordinationof activitiesthroughoutthe yearand
makingresources availableasneeded,notthroughannual budgetallocationslike inthe oldtraditional
budgetingmethod,however,itdoesseemtobe asolutionhere asdiscussedbelow.
There wouldbe problemstouse external benchmarksinthe case company.All inall,the interviewed
managersdidnot thinkthe external benchmarkingwouldbe possibleforafew reasons.
Firstof all,the data wouldnotbe available inreal-time.Eventhoughpubliclylisted companiesare
requiredtodisclose theirfinancialfigures yearly,thatisnotthe case for non-listedcompanies.The case
A company and itmaincompetitorsdonot have to disclose its financial figuresyearly.Thus,the external
benchmarkingcouldbe notbe achievable asthere wouldbe nofigurestobenchmarkagainst.Evenif
the figureswere made available, the problemof external benchmarkingwouldbe thatthe companies
may notcalculate the same metricsinthe same wayor the companies’organizationandownership
structures are vastly different. Therefore,the metricswouldnotbe realistically comparable.
The other issue inCase StudyA is that one onbehavioral issues regardingoldtraditional budgeting
method.
Hope & Fraser(2003), intheircriticismon oldtraditional budgeting,they pointedoutthe behavioral
problemsinthe process.Mostof themrelate toagencyproblemthatthe lowerlevel management are
pre-occupiedinpursuingtheirowngoalsandsuccessandwhichisusuallydetrimental tothe overall
organizational goals.
Eventhoughthe criticismwouldbe completelytrue,itisinterestingthatthe agencyproblemdoesnot
playany part inbeyondbudgeting.Basedonthe significanceof the agencyprobleminthe management
accountingresearch,itcould be assumedthatgivingmanagersmore freedomandautonomy wouldalso
increase the agencyproblem.Thus,the use of BeyondBudgetinginsteadof oldtraditional budgeting
mightnot eradicate thisissue.
The use of beyondbudgetingconceptwouldincreasethe autonomyof the managers,butatthe
same time increase theiradministrative workload,asthe conceptrequirescontinuous planning,
forecastingandbenchmarkingandespeciallybecausethe autonomywoulddecentralize muchof

127
the dutiesinthe company. Thereinlaysthe mostserioushindrance the Case Companywouldhave
regardingBB concept.The managers are extremelyfocusedon the doingtheirroutine dutiesand
meetingcompanydeadlines andaccomplishingcustomersorderintime.
Therefore the lowermanagementwouldbe unwillingtotake onextra administrative tasks.Therefore,
that burdenistriedto be minimizedandthey wouldmostlikelybe veryreluctanttoincrease their
administrativetasksjusttoavoidannual budgeting,whichatthe momentdoes nottake too muchof
theirtime asthe maindecisionsare made atthe executive managementlevel.
The resultsof the analysisaswell asthe answersfromthe managersindicate thatthe conceptof
Beyondbudgetingmostlikelywouldnotworkinthe case A company scenarioasit wouldgenerate
more problems thansolutions
5.5 Areas for further researchstudy:
Thisparticularcase study onlyfocusedononlylevelsof participation,communicationandcoordination
of the budget,the budgetingprocessapproach,level of feedbackandcontrol,othervariablessuchas
organizational politics,motivationof staff andtheireffectonbudgetperformance wouldthuswarranty
furtherresearch.
Organizational culture andlearninghave implicationsnotonlyfordecisionmakingbutalsobudget
performance ingeneral. Thisisyetanotherareaof furtherresearch.
Thisresearchstudydidnot coverhowbudgetsrelate tobehavior.Thishasbeenextensivelydiscussedin
the Reliance of AccountingPerformance Measures(RAPM).Itwouldbe of interestingtofind outhow
the economical,psychological andsociologicalfactorswould relate toCase StudyA’sbudgetaryprocess.
It wouldhelpinestablishinganoptimal approachinthe behavioral aspectsregardingthe budgetary
processinrelationtothe budgetperformance whilecreatingalinkbetweenthe twovariables.

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