403
16
MANAGEMENT
CONTROL SYSTEMS
Control is the process of ensuring that a firm’s activities conform to its plan and that its objectives
are achieved. There can be no control without objectives and plans, since these predetermine and
specify the desirable behaviour and set out the procedures that should be followed by members of the
organization to ensure that a firm is operated in a desired manner.
In an article published many years ago Drucker (1964) distinguished between ‘controls’ and ‘control’.
Controls are measurement and information, whereas control means direction. In other words, ‘controls’
are purely a means to an end; and that end is control. Control is the function that makes sure that
actual work is done to fulfil the original intention and ‘controls’ are used to provide information to assist
in determining the control action to be taken. For example, material costs may be greater than budget.
‘Controls’ will indicate that costs exceed budget and that this may be because the purchase of inferior
quality materials causes excessive wastage. ‘Control’ is the action that is taken to purchase the correct
quality materials in the future to reduce excessive wastage. ‘Controls’ encompass all the methods and
procedures that direct employees towards achieving the organization objectives. Many different control
mechanisms are used in organizations and the management accounting control system represents
only one aspect of the various control mechanisms that companies use to control their managers and
LEARNING OBJECTIVES After studying this chapter, you should be able to:
● describe the three different types of control used in organizations;
● distinguish between feedback and feed-forward controls;
● explain the potential harmful side-effects of results controls;
● define the four different types of responsibility centre;
● explain the different elements of management accounting control systems;
● describe the controllability principle and the methods of implementing it;
● discuss how the level of difficulty of targets impacts on motivation and performance;
● describe the influence of participation in the budgeting process;
● distinguish between the different approaches that manages use to evaluate budgetees’
performance.
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CHAPTER 16 MANAGEMENT CONTROL SYSTEMS404
employees. To fully understand the role that management accounting control systems play in the control
process, it is necessary to be aware of how they relate to the entire array of control mechanisms used
by organizations. Note that the term management control system is used to refer to the entire array
of controls used by an organization.
This chapter begins by describing the different types of controls that are used by companies. The
elements of management accounting control systems will then be described within the context of the
overall control process.
CONTROL AT DIFFERENT ORGANIZATIONAL LEVELS
Control is applied at different levels within an organization. Merchant and Van der Stede (2017) distinguish
between strategic control and management control. Strategic control has an external focus. The
emphasis is on how a firm, given its strengths and weaknesses and limitations, can compete with other
firms in the same industry. We shall explore some of these issues in Chapter 21 within the context of strategic
performance management. In this, and the next four chapters, our emphasis will be on management
control systems which consist of a collection of control mechanisms that primarily have a shorter-term
internal focus. The aim of management control systems is to influence employee behaviours in desirable
ways in order to increase the probability that an organization’s objectives will be achieved. Merchant and
Van der Stede define management control as dealing with employees’ behaviour. They state:
It is people in the organization that make things happen. Management controls are necessary to guard against
the possibilities that people will do something the organizations do not want them to do or fail to do something
they should do . . . If all employees could always be relied on to do what is best for the organization there would
be no need for management control systems.
The terms ‘management accounting control systems’, ‘accounting control systems’ and ‘management
control systems’ are often used interchangeably. Both management accounting and accounting control
systems refer to the collection of practices such as budgetary planning and control, standard costing and
periodic performance reporting that are normally administered by the management accounting function.
Management control systems, however, represent a broader term that encompasses management
accounting/accounting control systems but also includes other controls such as action, personnel and
social controls. These controls are described in the following section.
DIFFERENT TYPES OF CONTROL MECHANISM
Companies use many different control mechanisms to cope with the problem of organizational control.
To make sense of the vast number of controls that are used we shall classify them into three categories
using approaches that have been adopted by Ouchi (1979) and Merchant and Van der Stede (2017).
They are:
1 action (or behavioural) controls;
2 personnel, cultural and social controls;
3 results (or output) controls.
You should note that management accounting systems are normally synonymous with output controls
whereas management control systems encompass all the above categories of controls.
Action or behavioural controls
Behavioural controls (also known as action controls) involve observing the actions of individuals as
they go about their work. They are appropriate where cause and effect relationships are well understood,
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DIFFERENT TYPES OF CONTROL MECHANISM 405
so that if the correct actions are followed, the desired outcomes will occur. Under these circumstances,
effective control can be achieved by having superiors watch and guide the actions of subordinates. For
example, if the supervisor watches the workers on the assembly line and ensures that the work is done
exactly as prescribed, then the expected quality and quantity of work should ensue. Forms of action
controls described by Merchant and Van der Stede include behavioural constraints, preaction reviews
and action accountability.
The aim of behavioural constraints is to prevent people from doing things that should not be done.
They include physical constraints, such as computer passwords that restrict accessing or updating information
sources to authorized personnel, and administrative constraints such as imposing ceilings on
the amount of capital expenditure that managers may authorize is an example of an administrative
constraint.
Preaction reviews involve the scrutiny and approval of action plans of the individuals being controlled
before they can undertake a course of action. Examples include the approval by municipal authorities
of plans for the construction of properties prior to building commencing, or the approval by a tutor of a
dissertation plan prior to the student being authorized to embark on the dissertation.
Action accountability involves defining actions that are acceptable or unacceptable, observing the
actions and rewarding acceptable or punishing unacceptable actions. Examples of action accountability
include establishing work rules and procedures and company codes of conduct that employees must follow.
Line item budgets that were described in the previous chapter are another form of action accountability
whereby an upper limit on an expense category is given for the budget period. If managers exceed
these limits they are held accountable and are required to justify their actions.
Action controls that focus on preventing undesirable behaviour are the ideal form of control because
their aim is to prevent the behaviour from occurring. They are preferable to detection controls that are
applied after the occurrence of the actions because they avoid the costs of undesirable behaviour. Nevertheless,
detection controls can still be useful if they are applied in a timely manner so that they can lead to
the early cessation of undesirable actions. Their existence also discourages individuals from engaging in
such actions.
Personnel, cultural and social controls
Social or cultural controls involve the selection of people who have already been socialized into adopting
particular norms and patterns of behaviour required to achieve an organization’s objectives. For
example, if the only staff promoted to managerial level are those who display a high commitment to the
firm’s objectives then the need for other forms of controls can be reduced. Social/cultural controls represent
a set of values, social norms and beliefs that are shared by members of the organization and that
influence their actions. Control is exercised by individuals over one another – for example, procedures
used by groups within an organization to regulate performance of their own members and to bring
them into line when they deviate from group norms.
Personnel controls involve helping employees do a good job by building on employees’ natural
tendencies to control themselves. In particular, they ensure that the employees have the capabilities (in
terms of intelligence, qualifications and experience) and the resources needed to do a good job. This
requires appropriate training to ensure that employees know how to perform the assigned tasks and to
make them fully aware of the results and actions that are expected from them.
Results or output controls
Output or results controls involve collecting and reporting information about the outcomes of work
effort. The major advantage of results controls is that senior managers do not have to be knowledgeable
about the means required to achieve the desired results or be involved in directly observing the actions
of subordinates. They merely rely on performance reports to ascertain whether or not the desired outcomes
have been achieved. Management accounting control systems can be described as a form of
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CHAPTER 16 MANAGEMENT CONTROL SYSTEMS406
output controls. They are mostly defined in monetary terms such as revenues, costs, profits and ratios
such as return on investment. Results measures also include non-accounting measures such as the number
of units of defective production, the number of loan applications processed or ratio measures such
as the number of customer deliveries on time as a percentage of total deliveries.
Results controls involve the following stages:
1 establishing performance measures that the organization wishes to monitor;
2 establishing performance targets;
3 measuring performance;
4 providing rewards or punishment.
The first stage involves selecting performance measures for those aspects of activities that the organization
wishes to monitor. Ideally, desirable behaviour should improve the performance measure and
undesirable behaviour should have a detrimental effect on the measure.
The second stage requirement of a preset performance target informs individuals what to aim for and
enables employees or their superiors to interpret performance. The third stage specified above relates
to measuring performance. Ability to measure some outputs effectively constrains the use of results
measures. In the previous chapter, it was pointed out that the outputs in non-profit organizations are
extremely difficult to measure and inhibit the use of results controls. To encourage the right behaviours
results, measures should also be timely and understandable. Significant delays in reporting will result
in the measures losing most of their motivational impact and a lengthy delay in taking remedial action
when outcomes deviate from target. If measures are not understandable it is unlikely that managers will
know how their actions will effect the measure and there is a danger that the measures will lose their
motivational impact.
The fourth and final stage of results controls involves encouraging employees to achieve organizational
goals by having rewards (or punishments) linked to their success (or failure) in achieving
the results measures. Organizational rewards include salary increases, bonuses, promotions and
recognition. Employees can also derive intrinsic rewards through a sense of accomplishment and
achievement. Punishments include demotions, failure to obtain the rewards and possibly the loss of
one’s job.
FEEDBACK AND FEED-FORWARD CONTROLS
Feedback control involves monitoring outputs achieved against desired outputs and taking whatever
corrective action is necessary if a deviation exists. In feed-forward control, instead of actual
outputs being compared against desired outputs, predictions are made of what outputs are expected
to be at some future time. If these expectations differ from what is desired, control actions are taken
that will minimize these differences. The objective is for control to be achieved before any deviations
from desired outputs actually occur. In other words, with feed-forward controls, likely errors
can be anticipated and steps taken to avoid them, whereas with feedback controls, actual errors are
identified after the event and corrective action is taken to implement future actions to achieve the
desired outputs.
A major limitation of feedback control is that errors are allowed to occur. However, this is not usually
a significant problem when there is a short time lag between the occurrence of an error and the
identification and implementation of corrective action. Feed-forward control is therefore preferable
when a significant time lag occurs. The budgeting process is a feed-forward control system. To the
extent that outcomes fall short of what is desired, alternatives are considered until a budget is produced
that is expected to achieve what is desired. The comparison of actual results with budget, in identifying
variances and taking remedial action to ensure that future outcomes will conform with budgeted outcomes,
is an illustration of a feedback control system. Thus, accounting control systems consist of both
feedback and feed-forward controls.
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HARMFUL SIDE-EFFECTS OF CONTROLS 407
HARMFUL SIDE-EFFECTS OF CONTROLS
Harmful side-effects occur when the controls motivate employees to engage in behaviour that is not
organizationally desirable. In this situation, the control system leads to a lack of goal congruence.
Alternatively, when controls motivate behaviour that is organizationally desirable they are described as
encouraging goal congruence.
Results controls can lead to a lack of goal congruence if the results that are required can only be partially
specified. Here there is a danger that employees will concentrate only on what is monitored by the
control system, regardless of whether or not it is organizationally desirable. In other words, they will
seek to maximize their individual performance according to the rules of the control system, irrespective
of whether their actions contribute to the organization’s objectives. In addition, they may ignore other
important areas if they are not monitored by the control system. The expression ‘What you measure is
what you get’ applies in these circumstances.
Figure 16.1, derived from Emmanual, Otley and Merchant (1990), illustrates the problems that can
arise when the required results can only be partially specified. You will see that those aspects of behaviour
on which subordinates are likely to concentrate to achieve their personal goals (circle B) do not
necessarily correspond with those necessary for achieving the wider organizational goals (circle A). In
an ideal system, the measured behaviour (represented by circle C) should completely cover the area
of desired behaviour (represented by circle A). Therefore if a manager maximizes the performance
measure, he or she will also maximize his or her contribution to the goals of the organization. In other
words, the performance measures encourage goal congruence. In practice, it is unlikely that perfect
performance measures can be constructed that measure all desirable organizational behaviour, and so it
is unlikely that all of circle C will cover circle A. Assuming that managers desire the rewards offered by
circle C, their actual behaviour (represented by circle B) will be altered to include more of circle C and,
to the extent that C coincides with A, more of circle A.
However, organizational performance will be improved only to the extent that the performance measure
is a good indicator of what is desirable to achieve the firm’s goals. Unfortunately, performance
Defining success on what is spent rather
than what is achieved
The British government has pledged to spend
0.7 per cent of national aid resulting in £12 billion
being allocated to the Department for International
Development’s (DfID’s) aid budget despite the fact
that the Independent Commission on Aid Impact
published a scathing report on DfID’s efforts to
help developing countries. It concluded that the
programmes had unrealistic targets and their performances
were not properly assessed.
‘There is almost nothing better designed to
perpetuate wastefulness than the knowledge that
the overall budget is guaranteed come what may’,
writes Dominic Lawson in The Sunday Times (2015).
He cites that in 2012 the House of Lords’ economic
affairs committee warned that this target ‘wrongly
prioritizes the amount spent rather than the result
achieved; it makes the achievement of the spending
target more important than the overall effectiveness
of the programme’. In the same article Lawson
points out that the Department for International
Development spent a quarter of its £12 billion aid
budget in the final month of last year as it rushed to
meet its spending budget target with the result that
multilateral aid organizations were ‘being stuffed
with British taxpayers’ cash more quickly than they
knew what to do with it’.
Questions
1 What are the advantages and disadvantages of
using a fixed budget as outlined above?
2 What approaches can be taken to overcome
the problems relating to fixed budgets?
Reference
Lawson, D. (2015) ‘This is one target our armed forces
can afford to miss’, Sunday Times, 8 March.
REAL WORLD
VIEWS 16.1
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CHAPTER 16 MANAGEMENT CONTROL SYSTEMS408
FIGURE 16.1
The measurement and
reward process with
imperfect measures
Organizational
goals
Formal performance
measurement
system
Individual
manager’s
goals
A
B
System of
organizational
rewards
C
A Behaviour necessary to achieve organizational goals
B Behaviour actually engaged in by an individual manager
C Behaviour formally measured by control systems
measures are not perfect and, as an ideal measure of overall performance, are unlikely to exist. Some
measures may encourage goal congruence or organizationally desirable behaviour (the part of circle
C that coincides with A), but other measures will not encourage goal congruence (the part of circle C
that does not coincide with A). Consequently, there is a danger that subordinates will concentrate only
on what is measured, regardless of whether or not it is organizationally desirable. Furthermore, actual
behaviour may be modified so that desired results appear to be obtained, although they may have been
achieved in an undesirable manner that is detrimental to the firm.
It is clear that flaws in the performance measurement systems used by banks contributed to the
financial crisis in the banking sector in 2008. Bonuses and performance measures were based on shortterm,
rather than long-term performance, that did not take risk into account. These performance measures
encouraged managers to take actions to increase sales or profits when such actions resulted in
providing high risk loans. The performance measures motivated managers to increase the reported
sales revenues and profits, and thus their bonus, without considering the adverse long-term implications
of their actions. They were not engaging in organizationally desirable behaviour because the performance
measurement and reward system strongly encouraged them not to do so. Many would argue
that the managers were acting in an unethical manner but clearly the performance measurement and
the reward system was also at fault. We shall discuss how such dysfunctional behaviour may be reduced
in Chapters 19 and 21.
MANAGEMENT ACCOUNTING CONTROL SYSTEMS
Up to this point in the chapter, we have been looking at the broad context of management control
systems. We shall now concentrate on management accounting control systems that represent the predominant
controls in most organizations.
Why are management accounting controls the predominant controls? There are several reasons.
First, all organizations need to express and aggregate the results of a wide range of dissimilar activities
using a common measure. The monetary measure meets this requirement. Second, profitability
and liquidity are essential to the success of all organizations and financial measures relating to
these and other areas are closely monitored by stakeholders. It is therefore natural that managers
will wish to monitor performance in monetary terms. Third, financial measures also enable a common
decision rule to be applied by all managers when considering alternative courses of action.
That is, a course of action will normally benefit a firm only if it results in an improvement in its
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RESPONSIBILITY CENTRES 409
financial performance. Finally, measuring results in financial terms enables managers to be given
more autonomy. Focusing on the outcomes of managerial actions, summarized in financial terms,
gives managers the freedom to take whatever actions they consider to be appropriate to achieve the
desired results.
RESPONSIBILITY CENTRES
The complex environment in which most businesses operate today makes it virtually impossible for
most firms to be controlled centrally. It is simply not possible for central management to have all the
relevant information and time to determine the detailed plans for the entire organization. Some degree
of decentralization is essential for all but the smallest firms. Organizations decentralize by creating
responsibility centres. A responsibility centre may be defined as a unit of a firm such as a department
Crime-fighting targets lead to ‘dysfunctional’
policing says police chief
Government crime-fighting targets are a shambles
and should be scrapped, claims Chief Superintendent,
Ian Johnston. Mr Johnston was speaking
ahead of the Police Superintendents’ Association’s
annual conference, when he asked the police minister
to scrap the current targets regime.
‘I believe we should abolish the performance
framework in its entirety,’ Mr Johnston said. ‘It
sounds radical, but it would be very warmly welcomed
by the police service and would allow us,
the professionals, to make judgements. We want
to reclaim policing for the police.’ He added: ‘Centrally
imposed targets are preventing senior police
officers from delivering the policing that the public
wants and deserves. We need to restore discretion
to senior police officers enabling them to make decisions
that relate to local policing issues, ensuring
that we deliver a high standard of quality policing.’
The leaders of rank-and-file police officers have
made a similar demand to reverse the targetdriven
culture that has forced them to make ‘ludicrous’
decisions such as a case where a child was
arrested for throwing cream buns at a bus. The
Police Federation said judging officers purely on
how many arrests, cautions or on-the-spot fines
they can deliver was making a mockery of the
criminal justice system. The drive to meet Whitehall
performance targets was compelling officers
to criminalize middle England, they added.
The organization published a dossier of ridiculous
cases they claimed resulted from Home
Office targets placed on beat bobbies. The cases
included a Cheshire man who was cautioned by
police for being found in possession of an egg
with intent to throw and a West Midlands woman
arrested on her wedding day for criminal damage
to a car park barrier when her foot slipped on her
accelerator.
Today, Mr Johnston said, ‘current Home Office
targets have made some senior officers seriously
ill from the stress of managing a wide range of
competing demands. More than 70 per cent of
basic command unit commanders believe national
targets have had a negative impact on service
delivery. We are obliged to count everything and
in order to account for our performance we are not
addressing a lot of the issues that the public see
as far more important.’ He added: ‘The time has
come for someone to say that the performance
framework and the red tape and the bureaucracy
have got to go. The government’s focus on volume
crime targets is skewing all police activity
in a way that our members see as increasingly
dysfunctional.’
Question
1 How might the
dysfunctional
effects of the
performance
system in the
police force be
minimized?
Reference
www.dailymail.co.uk/news, 7 September 2007.
REAL WORLD
VIEWS 16.2
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CHAPTER 16 MANAGEMENT CONTROL SYSTEMS410
or division where an individual manager is held responsible for the unit’s performance. There are four
types of responsibility centre:
1 cost or expense centres;
2 revenue centres;
3 profit centres;
4 investment centres.
The creation of responsibility centres is a fundamental part of management accounting control
systems. It is therefore important that you can distinguish between the various forms of responsibility
centre.
Cost or expense centres
Cost or expense centres are responsibility centres whose managers are normally accountable for only
those costs that are under their control. We can distinguish between two types of cost centre – standard
cost centres and discretionary cost centres. The main features of standard cost centres are that output
can be measured and the input required to produce each unit of output can be specified. Control is exercised
by comparing the standard cost (that is, the cost of the inputs that should have been consumed in
producing the output) with the cost that was actually incurred. The difference between the actual cost
and the standard cost is described as the variance. Standard cost centres and variance analysis will be
discussed extensively in the next chapter.
Standard cost centres are best suited to units within manufacturing firms but they can also be established
in service industries such as units within banks, where output can be measured in terms of the
number of cheques or the number of loan applications processed and there are also well-defined input–
output relationships. Although cost centre managers are not accountable for sales revenues, they can
affect the amount of sales revenue generated if quality standards are not met and outputs are not produced
according to schedule. Therefore quality and timeliness non-financial performance measures are
also required besides financial measures.
Discretionary expense centres are those responsibility cost centres where output cannot be measured
in financial terms and there are no clearly observable relationships between inputs (the resources
consumed) and the outputs (the results achieved). Control normally takes the form of ensuring that
actual expenditure adheres to budgeted expenditure for each expense category and also ensuring that
the tasks assigned to each centre have been successfully accomplished. Examples of discretionary centres
include advertising and publicity and research and development departments. One of the major problems
arising in discretionary expense centres is measuring the effectiveness of expenditures. For example, the
marketing support department may not have exceeded an advertising budget but this does not mean that
the advertising expenditure has been effective. The advertising may have been incorrectly timed, it may
have been directed to the wrong audience, or it may have contained the wrong message. Determining the
effectiveness and efficiency of discretionary expense centres is one of the most difficult areas of management
control.
Revenue centres
Revenue centres are responsibility centres where managers are mainly accountable for financial
outputs in the form of generating sales revenues. Typical examples of revenue centres are where
regional sales managers are accountable for sales within their regions. Revenue centre managers
may also be held accountable for selling expenses, such as sales person salaries, commissions and
order getting costs. They are not, however, made accountable for the cost of the goods and services
that they sell.
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THE NATURE OF MANAGEMENT ACCOUNTING CONTROL SYSTEMS 411
Profit centres
Both cost and revenue centre managers have limited decision-making authority. Cost centre managers
are accountable only for managing inputs (costs) of their centres. Revenue centres are accountable
for selling the products or services but they have no control over their manufacture. A significant
increase in managerial autonomy occurs when unit managers are given responsibility for both production
and sales. In this situation, managers are normally free to set selling prices, choose which
markets to sell in, make product mix and output decisions and select suppliers. Units within an
organization whose managers are accountable for both revenues and costs are called profit centres
or business units. As the name implies, profit centres tend to be larger independent units within an
organization.
Investment centres
Investment centres are responsibility centres whose managers are responsible for both sales revenues
and costs and, in addition, have responsibility and authority to make capital investment decisions. Typical
investment centre performance measures include return on investment and economic value added.
These measures are influenced by revenues, costs and assets employed and thus reflect the responsibility
that managers have for both generating profits and managing the investment base.
Investment centres represent the highest level of managerial autonomy. They include the company as
a whole, operating subsidiaries, business units and divisions. You will find that many firms are not precise
in their terminology and call their investment centres profit centres. Profit and investment centres
will be discussed extensively in Chapter 19.
THE NATURE OF MANAGEMENT ACCOUNTING
CONTROL SYSTEMS
Management accounting control systems have two core elements. The first is the formal planning
processes such as budgeting and long-term planning that were described in the previous chapter.
These processes are used for establishing performance expectations for evaluating performance. The
second is responsibility accounting, which involves the creation of responsibility centres. Responsibility
centres enable accountability for financial results and outcomes to be allocated to heads of
responsibility centres throughout the organization. The objective of responsibility accounting is to
accumulate costs and revenues for each individual responsibility centre so that the deviations from a
performance target (typically the budget) can be attributed to the individual who is accountable for
the responsibility centre. For each responsibility centre, the process involves setting a performance
target, measuring performance, comparing performance against the target, analysing the variances
and taking action where significant variances exist between actual and target performance. In the
remainder of the chapter we shall focus on responsibility accounting within cost centres at lower
management levels rather than at the business unit level. We shall consider control and performance
measurement at higher organization levels relating to business units (profit centres and investment
centres) in chapters 19 and 21 where our focus will be on strategic performance measurement and
management.
Responsibility accounting relating to cost and revenue centres at lower management levels is implemented
by issuing performance reports at frequent intervals (normally monthly) that inform responsibility
centre managers of the deviations from budgets for which they are accountable and are required
to take action. An example of a performance report issued to a cost centre manager is presented in the
lower section of Exhibit 16.1. You should note that at successively higher levels of management, less
detailed information is reported. You can see from the upper sections of Exhibit 16.1 that the information
is condensed and summarized as the results relating to the responsibility centre are reported at
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CHAPTER 16 MANAGEMENT CONTROL SYSTEMS412
higher levels. Exhibit 16.1 includes only financial information. In addition, important non-financial
measures such as those relating to quality and timeliness may be reported.
Responsibility accounting involves:
● distinguishing between those items that managers can control and for which they should be held
accountable and those items over which they have no control and for which they are not held
accountable (i.e. applying the controllability principle);
● setting performance targets and determining how challenging the targets should be;
● determining how much influence managers should have in the setting of targets.
We shall now examine each of these items in detail.
EXHIBIT 16.1 Responsibility accounting monthly performance reports
Performance report to managing director
Budget Variancea
F (A)
Current
month
(£)
Year to
date
(£)
This
month
(£)
Year to
date
(£)
Managing
director
Factory A 453 900 6 386 640 80 000(A) 98 000(A)
Factory B X X X X
Factory C X X X X
Administration costs X X X X
Selling costs X X X X
Distribution costs X X X X
2 500 000 30 000 000 400 000(A) 600 000(A)
Performance report to production manager of factory A
Production
manager
Works manager’s office X X X X
Machining department 1 165 600 717 600 32 760(A) 89 180(A)
Machining department 2 X X X X
Assembly department X X X X
Finishing department X X X X
453 900 6 386 640 80 000(A) 98 000(A)
Performance report to head of responsibility centre
Head of
responsibility
centre
Direct labour
Direct materials X X X X
XXXX
Indirect labour X X X X
Indirect materials X X X X
Power X X X X
Maintenance X X X X
Idle time X X X X
Other X X X X
165 600 717 600 32 760(A) 89 180(A)
a
F indicates a favourable variance (actual cost less than budgeted cost) and (A) indicates an adverse budget (actual cost
greater than budget cost). Note that, at the lowest level of reporting, the responsibility centre head’s performance report
contains detailed information on operating costs. At successively higher levels of management, less detail is reported.
For example, the managing director’s information on the control of activities consists of examining those variances that
represent significant departures from the budget for each factory and functional area of the business and requesting
explanations from the appropriate managers.
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THE CONTROLLABILITY PRINCIPLE 413
THE CONTROLLABILITY PRINCIPLE
Responsibility accounting is based on the application of the controllability principle, which means that
it is appropriate to assign only those costs to responsibility centres that can be significantly influenced
by the manager of that responsibility centre. The controllability principle can be implemented by either
eliminating the uncontrollable items from the areas for which managers are held accountable or calculating
their effects so that the reports distinguish between controllable and uncontrollable items.
Applying the controllability principle is difficult in practice because many areas do not fit neatly into
either controllable and uncontrollable categories. Instead, they are partially controllable. Even when
outcomes are affected by occurrences outside a manager’s control, such as competitors’ actions, price
changes and supply shortages, a competent manager can take action to reduce their adverse effects.
He or she can substitute alternative materials where the prices of raw materials change or monitor and
respond to competitors’ actions. If these factors are categorized as uncontrollable, managers will not be
motivated to try and influence them.
Dealing with the distorting effects of uncontrollable
factors before the measurement period
Management can attempt to deal with the distorting effects of uncontrollables by making adjustments
either before or after the measurement period. Uncontrollable and controllable factors can be determined
prior to the measurement period by specifying which budget line items are to be regarded as
controllable and uncontrollable. Uncontrollable items can either be excluded from performance reports
or shown in a separate section within the performance report so that they are clearly identifiable. The
latter approach has the advantage of drawing managerial attention to those costs that a company incurs
to support its activities. Managers may be able to indirectly influence these costs if they are made aware
of the sums involved.
Dealing with the distorting effects of uncontrollable
factors after the measurement period
Merchant and Van der Stede (2017) identify four methods of removing the effects of uncontrollable
factors from the results measures after the measurement period and before the rewards are assigned.
They are:
1 variance analysis;
2 flexible performance standards;
3 relative performance evaluations;
4 subjective performance evaluations.
Variance analysis seeks to analyse the factors that cause the actual results to differ from predetermined
budgeted targets. In particular, it helps to distinguish between controllable and uncontrollable items and
identify those individuals who are accountable for the variances. For example, variances analysed by
each type of cost, and by their price and quantity effects, enables variances to be traced to accountable
individuals and also to isolate those variances that are due to uncontrollable factors. Variance analysis
will be discussed extensively in Chapters 17 and 18.
Flexible performance standards apply when targets are adjusted to reflect variations in uncontrollable
factors arising from the circumstances not envisaged when the targets were set. The most widely
used flexible performance standard is to use flexible budgets, whereby the uncontrollable volume
effects on cost behaviour are removed from the manager’s performance reports. Because some costs
vary with changes in the level of activity, it is essential when applying the controllability principle to
take into account the variability of costs. For example, if the actual level of activity is greater than the
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CHAPTER 16 MANAGEMENT CONTROL SYSTEMS414
budgeted level of activity, then those costs that vary with activity will be greater than the budgeted costs
purely because of changes in activity. Let us consider the simplified situation presented in Example 16.1.
Assuming that the increase in activity was due to an increase in sales volume being greater than that
anticipated when the budget was set, then the increases in costs arising from the volume change are
beyond the control of the responsibility centre manager. It is clearly inappropriate to compare actual variable
costs of £105000 from an activity level of 24000 units with budgeted variable costs of £100000 from
an activity level of 20000 units. This would incorrectly suggest an overspending of £5000. If managers are
to be made responsible for their costs, it is essential that they are responsible for performance under the
conditions in which they worked and not for a performance based on conditions when the budget was
drawn up. In other words, it is misleading to compare actual costs at one level of activity with budgeted
costs at another level of activity. At the end of the period, the original budget must be adjusted to the
actual level of activity to take into account the impact of the uncontrollable volume change on costs. This
procedure is called flexible budgeting. In Example 16.1, the performance report should be as follows:
Budgeted expenditure   Actual expenditure
(flexed to 24000 units)
£120000
(24000 units)
£105000
The budget is adjusted to reflect what the costs should have been for an actual activity of 24000 units.
This indicates that the manager has incurred £15000 less expenditure than would have been expected
for the actual level of activity and a favourable variance of £15000 should be recorded on the performance
report, not an adverse variance of £5000, which would have been recorded had the original
budget not been adjusted.
In Example 16.1, it was assumed that there was only one variable item of expense, but, in practice,
the budget will include many different expenses including fixed, semi-variable and variable expenses.
You should note that fixed expenses do not vary in the short term with activity and therefore the budget
should remain unchanged for these expenses. The budget should be flexed only for variable and semivariable
expenses.
Budgets may also be adjusted to reflect other uncontrollable factors besides volume changes. Budgets
are normally set based on the environment that is anticipated during the budget setting process. If
the budget targets are then used throughout the duration of the annual budget period for performance
evaluation, the managers will be held accountable for uncontrollable factors arising from forecasting
errors. To remove the managerial exposure to uncontrollable risks arising from forecasting errors, ex
post budget adjustments can be made whereby the budget is adjusted to the environmental and economic
conditions that the manager’s actually faced during the period.
Relative performance evaluation relates to the situations where the performance of a responsibility
centre is evaluated relative to the performance of similar centres within the same company or to similar
units outside the organization. To be effective, responsibility centres must perform similar tasks and
face similar environmental and business conditions with the units that they are being benchmarked
against. Such relative comparisons with units facing similar environmental conditions neutralizes the
uncontrollable factors because they are in effect held constant when making the relative comparisons.
An item of expense that is included in the budget
for a responsibility centre varies directly
in relation to activity at an estimated cost of
£5 per unit of output. The budgeted monthly level
of activity was 20000 units and the actual level of
activity was 24000 units at a cost of £105000.
EXAMPLE 16.1
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THE CONTROLLABILITY PRINCIPLE 415
The major difficulty relating to relative performance evaluations is finding benchmark units that face
similar conditions and uncertainties.
Instead of making the formal and quantitative adjustments that are a feature of the methods that
have been described so far, subjective judgements can be made in the evaluation process based on the
knowledge of the outcome measures and the circumstances faced by the responsibility centre heads.
The disadvantages of subjective evaluations are that they are not objective, they tend not to provide the
person being evaluated with a clear indication of how performance has been evaluated, they can create
conflict with superiors resulting in a loss of morale and a decline in motivation, and they are expensive
in terms of management time.
Guidelines for applying the controllability principle
Dealing with uncontrollables represents one of the most difficult areas for the design and operation of
management accounting control systems. The following guidelines published by the Report of the Committee
of Cost Concepts and Standards by the American Accounting Association in the United States in
1957 still continues to provide useful guidance:
1 If a manager can control the quantity and price paid for a service then the manager is responsible
for all the expenditure incurred for the service.
2 If the manager can control the quantity of the service but not the price paid for the service then
only that amount of difference between actual and budgeted expenditure that is due to usage
should be identified with the manager.
3 If the manager cannot control either the quantity or the price paid for the service then the
expenditure is uncontrollable and should not be identified with the manager.
Responsibility cost control systems in China
Because of the previous lack of effective control
of expenditure by the Han Dan Company, a system
of responsibility accounting and standard costing
was introduced. The basic principles underlying
the responsibility cost control system included:
(1)  setting cost and profit targets (responsibility
standards) that take into account market pressures;
(2) assigning target costs to various levels
of responsibility centre; (3) evaluating performance
based on fulfilment of the responsibility targets;
and (4) implementing a reward scheme with builtin
incentive mechanisms. In order to facilitate
performance measurement and evaluation, noncontrollable
common costs were excluded from the
responsibility costs decomposed within primary production
factories. Responsibility contracts between
factory managers and managers at lower levels
must also be signed. Breakdown of the aggregated
responsibility targets to all profit centres and their
subordinates are conducted by the Department of
Finance and Accounting. In addition, the department
is responsible for monthly and yearly reporting
of the execution results of the responsibility cost
control system. It also reports and analyses the
variances between actual outcomes and responsibility
targets and determines the necessary bonus
rewards (or penalty) for each responsibility centre
in terms of the fulfilment of the cost and profit targets
signed by managers. If a responsibility centre
or individual worker fails to meet the cost targets
specified in the responsibility contracts, all bonus
and other benefits relating to the responsibility unit
or worker will be forfeited.
Question
1 What are the limitations of linking bonuses to
meeting cost targets?
Reference
Jun Lin, Z. and Yu, Z. (2002) Responsibility, cost control
system in China: A case of management accounting
application, Management Accounting, 13(4), 447–467.
REAL WORLD
VIEWS 16.3
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CHAPTER 16 MANAGEMENT CONTROL SYSTEMS416
An example of the last situation is when the costs of an industrial relations department are apportioned
to a department on some arbitrary basis; such arbitrary apportionments are likely to result in an allocation
of expenses that the managers of responsibility centres may not be able to influence. In addition to
the above guidelines, Merchant and Van der Stede’s general rule should also be used as a guide – ‘Hold
employees accountable for the performance areas you want them to pay attention to’.
SETTING PERFORMANCE TARGETS AND DETERMINING
HOW CHALLENGING THEY SHOULD BE
There is substantial evidence from a large number of studies that the existence of a defined, quantitative
goal or target is more likely to motivate higher levels of performance than when no such target
is stated. People perform better when they have a clearly defined goal to aim for and are aware of the
standards that will be used to interpret their performance. The fact that a financial target represents a
specific quantitative goal gives it a strong motivational potential, but the targets set must be accepted if
managers are to be motivated to achieve higher levels of performance. Unfortunately, it is not possible to
specify exactly the optimal degree of difficulty for financial targets, since task uncertainty and cultural,
organizational and personality factors all affect an individual manager’s reaction to a financial target.
Figure 16.2, derived from Emmanuel, Otley and Merchant (1990), shows the theoretical relationship
between budget difficulty, aspiration levels and performance. In Figure 16.2, it is assumed that
performance and aspiration levels are identical. Note that the aspiration level relates to the personal goal
of the budgetee (that is, the person who is responsible for the budget). In other words, it is the level of
performance that they hope to attain. You will see from Figure 16.2 that, as the level of budget difficulty
is increased, both the budgetees’ aspiration level and performance increases. However, there becomes a
point where the budget is perceived as impossible to achieve and the aspiration level and performance
decline dramatically. It can be seen from Figure 16.2 that the budget level that motivates the best level
of performance may not be achievable. In contrast, a budget that is set based on what is expected to be
achieved (that is, the expectations budget in Figure 16.2) motivates a lower level of performance.
To motivate the highest level of actual performance, demanding budgets should be set and small
adverse variances should be regarded as a healthy sign and not as something to be avoided. If budgets
are always achieved with no adverse variances, this indicates that the standards are too loose to motivate
the best possible results.
It appears from our previous discussion that tight budgets should be established to motivate maximum
performance, although this may mean that the budget has a high probability of not being achieved.
FIGURE 16.2
The effect of budget
difficulty on performance
Performance
Expectations
budget
Optimal
performance budget
Budget
level
Adverse budget
variance
Actual
performance
Easy Budget difficulty Difficult
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DETERMINING HOW MUCH INFLUENCE MANAGERS SHOULD HAVE IN SETTING TARGETS 417
However, budgets are not used purely as a motivational device to maximize performance. They are also
used for planning purposes and it is most unlikely that tight budgets will be suitable for planning purposes.
Why? Tight budgets that have a high probability of not being achieved are most unsuitable for
cash budgeting and for harmonizing the company plans in the form of a master budget. Most companies
use the same budgets for planning and motivational purposes. If only one set of budgets is used
it is most unlikely that one set can, at the same time, perfectly meet both planning and motivational
requirements.
Budgets with a high probability of being achieved are widely used in practice. They provide managers
with a sense of achievement and self-esteem that can be beneficial to the organization in terms of
increased levels of commitment and aspirations. Rewards such as bonuses, promotions and job security
are normally linked to budget achievement so that the costs of failing to meet budget targets can be
high. The greater the probability of the failure to meet budget targets the greater is the probability that
managers will be motivated to distort their performance by engaging in behaviour that will result in the
harmful side-effects described earlier in this chapter.
DETERMINING HOW MUCH INFLUENCE MANAGERS
SHOULD HAVE IN SETTING TARGETS
Participation relates to the extent that budgetees are able to influence the figures that are incorporated
in their budgets or targets. Participation is sometimes referred to as bottom-up budget setting whereas
a non-participatory approach whereby subordinates have little influence on the target setting process is
sometimes called top-down budget setting.
Allowing individuals to participate in the setting of performance targets has several advantages. First,
individuals are more likely to accept the targets and be committed to achieving them if they have been
involved in the target setting process. Second, participation can reduce the information asymmetry gap
Community participation in local
budget spend
In a BBC documentary called Power to the People,
Michael Portillo visited a ‘You Decide’ session
organized by the local council in Tower Hamlets,
London. At this session, local people decide what
is to be done with £250000 of council money.
They are given fully costed options under headings
like healthcare, the elderly and local policing.
The options in each category can be debated for
a time, then all present ‘vote’ for their preferred
option using an electronic voting system. This
continues until all funds are used up. This, it
could be argued, saves the council a bit of time
and allocates resources to where residents deem
most appropriate. Of course £250000 is a long
way off a council’s full budget, but at least there
is participation in how the money is spent. There
is also now a ‘You Choose’ budget simulator website
that encourages the public to consider where
council budget cuts might fall, where efficiencies
might be made, and where income might be generated.
The You Choose software is available to all
councils in England and Wales and can be tailored
by each council to suit their needs. The results of
any input from council area residents are instantly
available to the council.
Questions
1 Can you think of any advantages of schemes or
tools like those mentioned above?
2 Can you think of any disadvantages?
Reference
You Choose: Budget consultation tool. Available
at www.idea.gov.uk/idk/core/page.do?pageId
=22436695
REAL WORLD
VIEWS 16.4
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CHAPTER 16 MANAGEMENT CONTROL SYSTEMS418
that applies when standards are imposed from above. Budgetees have more information than their superiors
on the relationships between outputs and inputs and the constraints that exist at the operating level
whereas the superiors have a broader view of the organization as a whole and the resource constraints
that apply. This information sharing process enables more effective targets to be set that attempt to deal
with both operational and organizational constraints. Finally, imposed standards can encourage negative
attitudes and result in demotivation and alienation. This in turn can lead to a rejection of the targets and
poor performance.
Participation has been advocated by many writers as a means of making tasks more challenging and
giving individuals a greater sense of responsibility. For many years participation in decision-making was
thought to be a panacea for effective organizational effort but this school of thought was later challenged.
The debate has never been resolved. The believers have never been able to demonstrate that participation
really does have a positive effect on productivity and the sceptics have never been able to prove the opposite.
Because of the conflicting findings relating to the effectiveness of participation, research has tended to
concentrate on studying how various factors influence the effectiveness of participation. If participation is
used selectively in the right circumstances, it has an enormous potential for encouraging the commitment
to organizational goals, improving attitudes towards the budgeting system and increasing subsequent performance.
Note, however, at this stage that there are some limitations on the positive effects of participation
in standard setting and circumstances where top-down budget setting is preferable. They are:
1 Performance is measured by precisely the same standard that the budgetee has been involved
in setting. This gives the budgetee the opportunity to negotiate lower targets that increase the
probability of target achievement and the accompanying rewards. Therefore an improvement in
performance – in terms of comparison with the budget – may result merely from a lowering of
the standard.
2 Participation by itself is not adequate in ensuring commitment to standards. The manager must
also believe that he or she can significantly influence the results and be given the necessary
feedback about them.
3 A top-down approach to budget setting is likely to be preferable where a process is highly
programmable and there are clear and stable input–output relationships. Here there is no need
to negotiate targets using a bottom-up process.
DIFFERENT APPROACHES THAT MANAGERS USE
TO EVALUATE BUDGETEES’ PERFORMANCE
Earlier in this chapter we discussed some of the harmful side-effects that can arise from the use of results
controls. Some of these effects can be due to the ways in which the output measures are used. A number
of studies have been undertaken that examine the side-effects arising from the ways that accounting
information is used in performance evaluation. A pioneering study undertaken many years ago by
Hopwood (1976) in a manufacturing division of a large UK company is still recognized as providing a
suitable description of the different ways managers use budgets to evaluate performance. Three distinct
styles of using budget and actual cost information in performance evaluation were observed:
1 Budget-constrained style: Despite the many problems in using accounting data as
comprehensive measures of managerial performance, the evaluation is based primarily on the
cost centre head’s ability continually to meet the budget on a short-term basis. This criterion
of performance is stressed at the expense of other valued and important criteria and a cost
centre head will tend to receive an unfavourable evaluation if his or her actual costs exceed the
budgeted costs, regardless of other considerations. Budget data are therefore used in a rigid
manner in performance evaluation.
2 Profit-conscious style: The performance of the cost centre head is evaluated on the basis of his
or her ability to increase the general effectiveness of his or her unit’s operations in relation to
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CONTINGENCY THEORY 419
the long- term goals of the organization. One important aspect of this at the cost centre level is
the head’s concern with the minimization of long-run costs. The accounting data must be used
with some care and in a rather flexible manner, with the emphasis for performance evaluation in
contributing to long-term profitability.
3 Non-accounting style: Accounting data play a relatively unimportant part in the supervisor’s
evaluation of the cost centre head’s performance.
The evidence from Hopwood’s study indicated that both the budget-constrained and the profitconscious
styles of evaluation led to a higher degree of involvement with costs than the non-accounting
style. Only the profit-conscious style, however, succeeded in attaining this involvement without incurring
either emotional costs for the managers in charge of the cost centres or defensive behaviour that
was undesirable from the company’s point of view.
The budget-constrained style gave rise to a belief that the evaluation was unjust, and caused widespread
worry and tension, resulting in manipulation of information and undesirable behaviour as methods
of relieving tension. In contrast, the profit-conscious style of evaluation avoided these problems,
while at the same time it ensured that there was an active involvement with the financial aspects of the
operations. A summary of the effect of the three styles of evaluation is given in Exhibit 16.2.
Hopwood’s study was based on cost centres having a high degree of interdependence. Rigid measures
of performance become less appropriate as the degree of interdependence increases and therefore the
managers used the accounting information in a more flexible manner to ensure that the information
remained effective. Otley (1978) replicated Hopwood’s study in a British firm that consisted of profit
centres with a high degree of independence and where accounting information represented a more
adequate basis of performance evaluation. He found no significant differences in the levels of job tension
and performance reported by managers evaluated on styles initially used by Hopwood. Possible
explanations for the differences included the fact that in Otley’s study, managers operated more independently
of other units within the same organization and the managers in Hopwood’s study operated
in a less predictable environment than those in Otley’s study.
Using a budget-constrained style when managers face high levels of interdependence or uncertainty
is likely to be inappropriate because the rigid use of budget data assumes that most of the factors
that have an effect on outcomes are within the control of the managers being evaluated. In contrast,
the rigid use of budget data may be more acceptable where managers perceive that they are able to
exercise control over their performance outcomes. This applies where there is low uncertainty or
interdependency.
CONTINGENCY THEORY
To design effective management accounting control systems, it is necessary to consider the circumstances
in which they will be used. It should be apparent from this chapter that there is no universally
best management accounting control system which can be applied to all organizations.
EXHIBIT 16.2 Hopwood’s findings on the effect of different styles of evaluating budget performance
Style of evaluation
Budget constrained Profit conscious Non accounting
Involvement with costs High High Low
Job-related tension High Medium Medium
Manipulation of
accounting information Extensive Little Little
Relations with superior Poor Good Good
Relations with colleagues Poor Good Good
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CHAPTER 16 MANAGEMENT CONTROL SYSTEMS420
The applicability of a management accounting control system is contingent on the situational factors
faced by organizations. This approach is known as the contingency theory approach to management
accounting. The situational factors represent the contingent factors (also known as contingent variables
or contextual factors). Examples of the contingent factors that have been examined in the literature
include the external environment faced by organizations, the type of competitive strategy they
adopt, organizational structure and the nature of the production process. The aspects of the management
accounting control systems that contingency theory research has focused on include dimensions
of budgeting (participation, importance of meeting budgets), reliance on accounting information for
performance evaluation and dimensions of information (e.g. timeliness and level of aggregation). For
example, in this chapter it has been pointed out that the appropriateness of participation is dependent
on the nature of the production process. In the previous section, it was also suggested that the appropriate
style of performance evaluation was influenced by organizational structure and environmental
uncertainty.
A considerable amount of literature has emerged focusing on the contingency theory of management
accounting. For a detailed summary of this literature you should refer to Learning Note 16.1 in the digital
support resources accompanying this book (see Preface for details).
ALTERNATIVE USES OF MANAGEMENT
ACCOUNTING INFORMATION
Throughout this book, it is generally assumed that one of the major purposes of management accounting
is to aid rational economic decision-making. However, at this stage, it is important that you are aware
that accounting information can also be used for other purposes that are not necessarily consistent with
rational economic behaviour. Managers can find value in accounting information for symbolic purposes
even when the information has little or no relation to decision-making. For example, instead of the
information actually being used for decision-making or control purposes, it may be used as a means of
signalling to others inside and outside the organization that decisions are being taken rationally and that
managers in an organization are accountable. Accounting information is also used for political purposes.
Interested parties use the information to promote their own vested interests to achieve political power
or a bargaining position. Finally, accounting information may be used for legitimizing purposes in order
to justify and legitimize actions that have already been decided on, rather than the information being
used as a decision input. For a more detailed discussion of the different purposes for which accounting
information is used, you should refer to Learning Note 16.2 in the digital support resources accompanying
this book.
SUMMARY
The following items relate to the learning objectives listed at the beginning of the chapter.
● Describe the three different types of control used in organizations.
Three different categories of controls are used – action/behavioural controls, personnel and cultural
controls and results/output controls. With action controls, the actions themselves are the
focus of controls. Personnel controls help employees do a good job by building on employees’
natural tendencies to control themselves. They include selection and placement, training and job
design. Cultural controls represent a set of values, social norms and beliefs that are shared by
members of the organization and that influence their actions. Output or results controls involve
collecting and reporting information about the outcomes of work effort.
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421SUMMARY
● Distinguish between feedback and feed-forward controls.
Feedback control involves monitoring outputs achieved against desired outputs and taking whatever
corrective action is necessary if a deviation exists. In feed-forward control, instead of actual
outputs being compared against desired outputs, predictions are made of what outputs are
expected to be at some future time. If these expectations differ from what is desired, control
actions are taken that will minimize these differences.
● Explain the potential harmful side-effects of results controls.
Results controls can promote a number of harmful side-effects. They can lead to a lack of goal
congruence when employees seek to achieve the performance targets in a way that is not organizationally
desirable. They can also lead to data manipulation and negative attitudes, which can
result in a decline in morale and a lack of motivation.
● Define the four different types of responsibility centre.
A responsibility centre may be defined as a unit of a firm where an individual manager is held
accountable for the unit’s performance. There are four types of responsibility centre – cost or
expense centres, revenue centres, profit centres and investment centres. Cost or expense centres
are responsibility centres where managers are normally accountable for only those costs
that are under their control. Revenue centres are responsibility centres where managers are
accountable only for financial outputs in the form of generating sales revenues. Units within
an organization whose managers are accountable for both revenues and costs are called profit
centres. Investment centres are responsibility centres whose managers are responsible for both
sales revenues and costs and, in addition, have responsibility and authority to make capital
investment decisions.
● Explain the different elements of management accounting control systems.
Management accounting control systems have two core elements. The first is the formal planning
processes such as budgeting and long-term planning. These processes are used for establishing
performance expectations for evaluating performance. The second is responsibility accounting,
which involves the creation of responsibility centres. Responsibility centres enable accountability
for financial results/outcomes to be allocated to individuals throughout the organization.
● Describe the controllability principle and the methods of implementing it.
The controllability principle states that it is appropriate to charge to an area of responsibility only
those costs that are significantly influenced by the manager of that responsibility centre. The
controllability principle can be implemented by either eliminating the uncontrollable items from
the areas that managers are held accountable for or calculating their effects so that the reports
distinguish between controllable and uncontrollable items.
● Discuss how the level of difficulty of targets impacts on motivation and performance.
Different types of performance target can be set ranging from easily achievable to difficult to
achieve. Targets that are considered moderately difficult to achieve (called highly achievable
targets) are recommended because they can be used for planning purposes and they also have
a motivational impact.
● Describe the influence of participation in the budgeting process.
Participation relates to the extent to which budgetees are able to influence the figures that
are incorporated in their budgets or targets. Allowing individuals to participate in the setting of
performance targets results in individuals being more likely to accept the targets and be committed
to achieving them. Participation, however, is subject to the limitation that performance
is measured by precisely the same standard that the budgetee has been involved in setting.
Participation must be used selectively; but if it is used in the right circumstances, it has an
enormous potential for encouraging the commitment to organizational goals.
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