An Analysis of Managerial Biasing: Evidence From a Company's Budgeting Process

Abstract

THIS paper reports on research into the sales budgeting process in two successive years in a retail chain of between 300 and 400 shops operating in oligopolistic situations in each of its local markets.The annual budgeting procedure is probably the most important single decision and control routine of a firm from both the organizational and economic management viewpoints. As such it assumes the role of an internal market by which resources are allocated within the firm.From the Organizational viewpoint the annual forecast of expected costs and revenues is a means through which, in terms of a behavioural theory of the firm', the managerial coalition is able to agree on a planned allocation of resources which will maintain the coalition and thus the organizational stability of the f i r m . Thus it is a means by which managerial conflicts can be resolved and the careers of managers partly determined through the pattern of resource allocation to departments of the firm.From the economic viewpoint, the short-term budget is usually an important determinant of a number of economic decisions. The outcome measured by the projected net revenue and cash flows will normally present either the problems of an insufficiency (if low) or of an over-abundance (if high). In both cases a review of current and capital expenditure plans is likely to follow and, in addition, pricing and output policies may be questioned.In the company we studied projected net revenue fell short of an 'aspired' profit level and hence expenditure plans were reviewed. It resulted in adjustments to a number of departmental budgets* and through a residual funds approach af€ected the investment pr~gramme.~ There is also the possibility that the pricing policy and employment decisions may be reviewed though our evidence only indirectly reveals the latter through the effect of the shortfall on managerial attitudes towards pay claims.The budgeting mechanism, like the external market, is by no means perfect embodying as it does both complementary and competing objectives in See Cycrt, R. M. and LMarch J, G., A Behavioral Theory of the Firm, Prentice-Hall. 1963.Funds available for investment were calculated on the basis of expected net profits plus * For example the advertising and training budgets were cut. depreciation charges less tax and dividend appropriations.

Organizational Slack and Risk‐taking Behaviour: Tests of Product Pricing Strategy

“…Risk taking is likely permitted because slack provides the source of resources to cushion or absorb failure. Given such behavioural effects of slack, one might question the completeness of organizational theories (Wolf, 1971), economic views (Leibenstein, 1976;Shelton, 1967) and accounting/budgeting studies (Lowe and Shaw, 1968;Lewin, 1970, 1967) that stress efficiency and consequently assume that slack is necessarily undesirable.…”

Relationship of Budgetary Slack With Participation and Emphasis on Budget and Information Asymmetry

“…De acordo com Lowe e Shaw (1968) e Merchant (1985, a ênfase no orçamento aumenta a probabilidade da constituição da folga orçamentária. Porém, os resultados neste estudo não permitiram realizar tal inferência para a amostra analisada.…”

“…Constatou-se nesta pesquisa uma correlação de 76,92% entre a folga orçamentária e a participação no orçamento e a ênfase no orçamento. Lowe e Shaw (1968) afirmam que é normal a folga estar presente em orçamentos em que o cumprimento das metas orçadas é enfatizado. Merchant (1985) também comenta que a probabilidade dos gerentes criar folga orçamentária aumenta devido à pressão vinda dos superiores em alcançar as metas orçadas.…”

Do forecasts produced by organizations reflect anchoring and adjustment?

“…make conservative revenue forecasts to restrain spending, Larkey and Smith, 1984); (ii) the direct and indirect incentives facing managers (e.g. forecast low to look good on evaluations, Lawler, 1976;Lawler and Rhode, 1976;Lowe and Shaw, 1968); (iii) training and organizational culture which may infiuence managers in ways of which they are not aware (e.g. risk-taking cultures in organizations or training of accountants to be 'conservative' in judgement); and (iv) organizational routines and decision processes which may have both direct and indirect infiuences on decisions (see Crecine, 1969;Cyert and March, 1963).…”