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assignmentreading5-_operational_reasons_to_budget_.pdf
An exploratory study of operational reasons to budget
Prabhu Sivabalan a , Peter Booth
a , Teemu Malmi
b , David A. Brown
a
a School of Accounting, University of Technology, Sydney, 2007, Australia b Department of Accounting and Finance, Helsinki School of Economics,
00101 Helsinki, Finland
Abstract
Budgets are used widely but criticized, mainly for performance evaluation reasons. Wefindthatorganizationsregardbudgetsasmoreimportantforplanningandcontrol than evaluation, thus proposing a rationale for their continued use irrespective of evaluation-based criticisms. This finding is also important, because most extant budget research focuses on evaluation, suggesting a potential disconnect between budget research and practice. We also find that rolling forecasts are used in tandem with the annual budget in most organizations, and for the same reasons. This was unexpected, as coexistence suggests their adoption for different reasons.
Key words: Budget; Management control; Rolling forecast
JEL classification: M00
doi: 10.1111/j.1467-629X.2009.00305.x
1. Introduction
Budgets are often strongly criticized by practitioners and academics (Wallander, 1999; Hope and Fraser, 2003; Jensen, 2003). Despite this, studies have shown that the vast majority of organizations still use budgets (Umapathy, 1987; Ekholm and Wallin, 2000).
1 This raises the question: if budgets are so problematic,
The authors thank CPA Australia for their financial assistance and access to their practitioner databases. We also thank the responses from discussants and participants of the 2005 Account- ing & Finance Association of Australia and New Zealand and 2006 European Accounting Association conferences, respondents from the Management Accounting Research Collabora- tive (MARC) group in the University of Technology, Sydney, and workshop respondents to this paper from the same university. Finally, we gratefully acknowledge the comments of the two anonymous reviewers for their advice on making the article publishable.
Received 18 September 2007; accepted 24 February 2009 by Gary Munroe (Deputy Editor).
1 Umapathy (1987) finds use levels of 97 per cent and Ekholm and Wallin (2000) find that
92 per cent of surveyed firms used budgets.
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Accounting and Finance 49 (2009) 849–871
why is it that most organizations continue to use them? This study investigates two possible reasons. First, organizations may budget for reasons other than those considered by
critics of budgeting. Most budget research and practitioner criticism focus on the use of budgets for evaluation reasons (Jensen, 2003; Hansen and Van der Stede, 2004). However, formal financial controls, such as annual budgets, might also be used for planning and control reasons (Merchant and Van der Stede, 2003). Consequently, if budgets are used for planning and control as opposed to evaluation, many budget criticisms might no longer be relevant (or less so), and, therefore, explaining an organization’s continued use of budgets. Second, rolling forecasts are argued by practitioners to be a substitute for the
annual budget (Bogiages, 2004). Rolling forecasts involve more frequent fore- casting by companies in order to generate more accurate financial predictions; therefore, they overcome many of the problems claimed for annual budgets, which have been the focus of critique to date. Similar to the argument above, the use of improved budgeting practices may explain why budgeting persists despite the significant criticisms in the literature. The present study examines the importance of 10 possible operational reasons
to budget in organizations, encompassing planning, control and evaluation. It also considers whether rolling forecasts may enhance the outcomes from budgetary planning, control and evaluation. By examining these two major rationales, the study provides insights into the continued use of budgets, irrespective of criticisms. Results from our survey of 331 accountants in medium to large organizations
indicate that planning and control reasons are regarded as more important than evaluation reasons for budgets. Furthermore, rolling forecasts seem to be used as complements to (not substitutes for) the annual budget. In addition, annual budgets and rolling forecasts are used for nearly identical reasons, which is somewhat surprising, as we expected that the two budget forms would be used for differing purposes. Overall, the study contributes to the budget research literature by providing
empirical evidence for the higher importance of a range of planning and control operational budget reasons in organizations, relative to evaluation reasons. This is significant, because current contingency linkages between organizational characteristics and budgetary characteristics such as budget emphasis, budget participation and budget use assume the evaluation reason when conceptualizing these variables (Brownell and Hirst, 1986; Brownell and Dunk, 1991). There- fore, the way in which research defines and theorizes budget variables could be broadened beyond the evaluation reason to maintain relevance in the analysis of established contingency relationships. This study also contributes to developing literature on rolling forecasts by
providing empirical evidence that annual budgets and rolling forecasts are used in parallel for essentially similar operational budget reasons. This suggests a collaborative use of annual budgets and rolling forecasts rather than the current arguments that rolling forecasts are substitutes for annual budgets.
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The next section reviews the budget literature by first examining research that has investigated evaluation budget reasons. This is followed by a discussion of the 10 operational budget reasons considered in this study. Following from this is an analysis of the relationship between rolling forecasts and annual budgets. Section 3 outlines the research method adopted for this study. This is followed by a discussion of the results, conclusions and limitations of the study.
2. Literature review and proposition development
2.1. Evaluation focus
The three key performance evaluation constructs used in budget research are budget emphasis, budget participation and budget use. All three have been considered extensively, including the participative budgeting and Reliance on Accounting Performance Measures (RAPM) research areas.
2
The budget emphasis construct considers the focus given by an organization to the budget (Hopwood, 1972). Budget emphasis proxies the extent to which a company focuses on budgets as a management control device. A high budget emphasis indicates a strong focus, while a low budget emphasis is the reverse. An analysis of the items used to measure this construct shows that they have a strong staff evaluation focus (see Hopwood, 1972). Indeed, the term used to describe the budget emphasis measure is ‘budget evaluative style’. If an organ- ization places a high emphasis on using budgets for planning and control but not evaluation, the Hopwood (1972) budget emphasis measure will classify the organization as having low budget emphasis, as there are no items in this measure to acknowledge the use of budgets for planning and control. The participative budgeting construct considers the extent of staff input into
the setting of budgets, for the purpose of understanding its effects on staff eval- uation. The Milani (1975) budget participation measure, the most commonly used, contains six items that primarily relate to the preparation of budgets for evaluation purposes (Brownell and Dunk, 1991). Even where statements inves- tigate the participation of staff during the budget setting (planning) process, this is with a view to evaluating staff at the end of the period. The budget use construct has been defined as the role of budgets for formal
performance evaluation in the work unit. It was initially considered by Swieringa and Moncur (1975), and subsequently used in Abernethy and Stoelwinder (1991) and Hoque and Hopper (1997). As defined, the budget use measure focuses again on evaluation as the primary reason for budgeting. Consideration of the above three budget constructs highlights the strong
focus on evaluation in budget research. If budgets are primarily used for evaluation
2 These two are central to the development of budget research, and represent a significant
majority of budget research conducted in extant academic studies (Luft and Shields, 2003).
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in practice, then this focus is acceptable. However, if planning and control budget reasons are also important, research must identify key budget constructs more broadly, so as to increase the relevance of budget research to budget practice. Recent research has begun to focus more explicitly on the use of budgets for
reasons other than evaluation. Hansen and Van der Stede (2004) specifically discussed the narrow focus on evaluation in budget research. They argued that contingency relationships between evaluation budget reasons and various organizational and budgetary characteristics may be different for non-evaluation reasons, suggesting that more research could consider alternative reasons for budgeting. Hansen and Van der Stede (2004) identified two operational reasons to
budget (planning and evaluation), and considered whether these reasons had different relationships to a range of major organizational characteristics. They found different relationships involving the operational planning and perform- ance evaluation budget reasons. For example, the use of rolling budgets was positively related to budget benefits for the operational planning budget reason, but negatively related to budget benefits for the performance evaluation budget reason. They also found that resource traceability and the competitiveness of an environment was positively related to the importance of budgeting for perform- ance evaluation, but unrelated to the importance of budgeting for operational planning. However, Hansen and Van de Stede (2004) did not discuss the relative impor-
tance of their planning and evaluation reasons. Our study expands on these two operational reasons by proposing 10 more specific operational budget reasons and by exploring their relative importance. The 10 budget reasons are structured around the planning (6), control (2) and evaluation (2) functions described by Merchant and Van der Stede (2003). We will discuss evaluation first, then planning and finally control.
2.2. Operational budget reasons
2.2.1. Evaluation reasons
The performance evaluation budget reason identified in Hansen and Van der Stede (2004) can be decomposed into staff evaluation and business unit evalu- ation. The staff evaluation budget reason has been extensively investigated in existing research (Mia, 1993; Lau et al., 1995; Hansen et al., 2003). The business unit evaluation reason has been discussed, but often in tandem with staff evaluation. For example, the Milani (1975) measure for budget participation considers the evaluation of staff and business units within the same framework, implicitly assuming a similarity in practice. We argue that they might not be similar and that their impacts on budget use may be different. For example, in a high uncertainty environment, organizations may not use budgets to evaluate
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staff due to the difficult predictive circumstances making the budget an irrelev- ant performance benchmark. However, in the same setting, organizations may still want to know how a business unit has been performing relative to a budget. Although uncontrollable factors might have impacted upon this assessment, it is still useful for an organization to know whether its business units have done better or worse than budget. In this setting, the use of budgets for business unit evaluation may be high, while it may be low for staff evaluation. Therefore, it is possible that in different contexts the use of budgets for staff evaluation and for business unit evaluation may be aligned in different ways. This specificity in the analysis of evaluation budget reasons has not been considered in existing research.
2.2.2. Planning reasons
Operational planning budget reasons include coordination of resources, formulation of action plans, management of production capacity, determination of required selling prices, encouragement of innovative behaviour and provision of information to external parties. These reasons were derived from an investigation of existing academic and practitioner research. Coordination of resources is a key operational planning reason that is discussed
in extant participative budgeting research, but not explicitly studied. Organizations often create budgets in order to inform departments and other organizational units about their funding constraints, prior to period commencement. Departments request a budget, and a budget committee comprising senior managers negotiates an amount with departments. The resulting budget must be adhered to by departments (Brownell and Dunk, 1991). Therefore, coordination of resources is the process of requesting and negotiating budget funds. A budget might also be used as a means of formulation of action plans. In
many organizations, budgets assist organizations to cost a range of alternative courses of action (Merchant and Van der Stede, 2003). This reason may not be department specific. It relates to the use of budget data to assist choosing between competing alternatives. Budgets might also be used to assist organizations in the management of
production capacity in an upcoming period. Through standard costing variables such as the ‘normal capacity’ value, budgets allow organizations to reflect on their level of activity and the extent to which they utilize their operating capacity (Langfield-Smith et al., 2005). The expected costs determined in a budget may be used as the basis for the
determination of required selling prices in an upcoming period. The use of standard costing systems in many organizations requires the implementation of forecast numbers to cost products in advance (Langfield-Smith et al., 2005). This directly impacts upon the determination of selling prices. Budgets may be created for the encouragement of innovative behaviour.
Through the planning process, organizations can increase the amounts allocated
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to specific areas of the business, to stimulate certain types of behaviours amongst staff. The relationship between budget emphasis and innovative behaviours within a management control context has been explored in existing management accounting research. For example, Subramaniam and Mia (2003) find that the allocation of more flexible budget-based evaluation suited marketing managers due to their greater emphasis on innovation, relative to production managers. Therefore, an appropriately constructed budget might encourage innovative actions. Budget numbers are often created for the provision of information to external
parties (Merchant and Van der Stede, 2003). Most publicly listed medium and large organizations create annual budgets and shorter period forecasts to satisfy market information requirements. Budgets may also be provided to creditors, informing them of an organization’s expected future financial position.
2.2.3. Control reasons
The two control budget reasons are a monitoring device by the board of directors and control of costs. Both relate to the management of organizations using budgets during a specific period. Budgets are often used as a monitoring device by the board of directors of an organization through formal approval of what is expected in a future period and then regular review of performance against budget (Baysinger and Butler, 1985). The budget is one of the few formal financial controls provided to directors and represents a financial expectation communicated from senior management to directors. From an operational per- spective, directors may use the budget to monitor an organization’s progress intraperiod, noting significant deviations and questioning senior management regarding progress. During a period, budgets also directly allow the control of costs by organiza-
tions intraperiod, by managing their budgeted spending constraints. Given that budgets embed knowledge of spending expectations, organizations are better able to focus on keeping costs to budget during a period and actively engage in efforts to control costs. Having considered the 10 operational budget reasons, we now explain how the
main budget criticisms relate primarily to the two evaluation reasons. This is important, as the motivation for organizations to continue using budgeting irrespective of criticisms only has validity if the root criticisms of budgeting stem from the evaluation reason.
2.3. Budget criticisms
The seminal research by Argyris (1952) established the core themes of evaluation-related budget criticism. He explained that most organizations use budgets as a device for motivating staff, but that this motivating factor could be over-ridden by the presence of Job-Related Tension (JRT). Argyris (1952)
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argues that JRT occurs when staff perceive budgets as difficult to achieve. The presence of JRT causes employees to modify their behaviour in suboptimal ways, to achieve the budget target. Employees do so because they feel the pressure of meeting a budget and they alter the operational conditions in their environment or the budgeting process in response. Hopwood (1972) and Otley (1978) similarly considered the relation between
budget emphasis (staff evaluation focus) and organizational outcomes. Further- more, budget research in the 1980s and 1990s was characterized by participative budgeting (Shields and Shields, 1998) and RAPM (Hartmann, 2000) research, which predominantly focused on budgets as an evaluative mechanism. Later research focused on the evaluation challenges, including Wallander’s work (1999) and the stream of participative budgeting research discussed in Shields and Shields (1998). The RAPM literature also acknowledges the detrimental effects of budget use when used as an evaluation device, in their consideration of budget- based targets for performance measurement (Hartmann, 2000). While the use of budgets for planning and control also may be problematic,
these difficulties may partly result from the use of budgets for evaluation. For example, when companies use budgets to evaluate staff, staff may engage in game-playing (Jensen, 2003) during the preperiod planning stage. This directly thwarts the planning and control processes relating to budgeting, as the budget numbers developed are not sufficiently accurate and, therefore, not regarded as important by staff (often the same individuals gaming the budget). Therefore, planning and control difficulties result from the use of budgets for evaluation. Hope and Fraser (2003) similarly argued that as a result of the evaluation-related problems in budgeting, organizations should abandon budgeting and adopt a more activity-focused approach to forecasting that is cross-departmental and less likely to engender managerial gaming. If the majority of budget criticisms relate to budgets as an evaluation tool,
and organizations continue to use budgets, this may be explained by organiza- tions placing greater importance on planning and control budget reasons than on evaluation reasons. Of course, it is unrealistic to assert that all planning and control reasons will be more important, given the exploratory nature of this study. However, at least a subset of planning and control reasons should be more important, given the arguments presented. This leads to the first proposition:
P1: Planning and control budget reasons are more important than evaluation budget reasons.
2.4. Rolling forecasts
Organizations are increasingly using alternative budget forms such as rolling forecasts for management control (Barrett, 2003; Bogiages, 2004; Lynn and Madison, 2004; Haka and Krishnan, 2005). A rolling forecast is usually pro- duced monthly or quarterly, and enables organizations to periodically adjust its
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expected numbers within an annual period to reflect the current market realities faced by companies (Haka and Krishnan, 2005). Existing studies argue that by using rolling forecasts to forecast more frequently than once per annum (annual budget), companies are able to reduce the detrimental effects of uncertainty on budgeting (Bogiages, 2004). In some organization case studies, practitioners have described the use of
rolling forecasts (Bittlestone, 2000). However, little research has investigated the extent to which rolling forecasts exist across organizations. Furthermore, the majority of practitioner studies have argued for the use of rolling forecasts as a substitute for annual budgets (Bittlestone, 2000; Bogiages, 2004; Lynn and Madison, 2004). However, this argument appears contrary to the reality of high annual budget use in organizations (Umapathy, 1987; Ekholm and Wallin, 2000). The present study provides empirical insights to inform the debate on whether rolling forecasts are substitutes for or complements to the annual budget. This study also considers the reasons for using rolling forecasts and compares them to the reasons for using annual budgets. By forecasting over short periods, the rolling forecast reduces the time interval
between planning and business reality. This should make organizations more competitive and responsive to change (Gurton, 1999; Neely et al., 2001), especially when economic conditions rapidly change. The annual budget, by contrast, has been argued to be out of date too soon after it is created (Myers, 2001). This problem is minimized when budgeting more frequently. Also, and as a result of more accurate and frequent predictions, rolling forecasts facilitate organizational learning and provide managers with more confidence in the budget numbers that are used for short-term operational planning (Hansen et al., 2003; Haka and Krishnan, 2005). From a performance evaluation perspective, evidence on the impact of rolling
forecasts is mixed. Staff may find it more difficult to take ‘free rides’ (Myers, 2001) when their annual targets are met well prior to the end of a period, since, under a rolling forecast system, updates to numbers occur monthly or quarterly. Therefore, rolling forecasts reduce the ‘free ride’ period and, hence, provide more relevant accounting numbers for performance evaluation. However, Gurton (1999) argues that rolling forecasts can negatively affect performance evaluation, because evaluating individuals over shorter periods provides much higher administrative workloads for management, and the performance evalu- ation process becomes more cumbersome. Also, because budgets are prone to change, it is difficult to provide staff with a performance evaluation target using rolling forecasts. The target will continually change as budgets change. Haka and Krishnan (2005) similarly argued that rolling forecasts reduce goal congru- ence, as they frequently shift budget targets for staff, when used for evaluation. Ifrolling forecasts are introduced primarilyfor ensuring better qualityshort-term
predictions, and the annual budget is less capable of producing accurate predictions (Haka and Krishnan, 2005), then planning and control reasons should be more important for rolling forecasts thanfor annualbudgets,asproposedbelow.
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P2: Planning and control budget reasons are regarded as more important for rolling forecasts than for annual budgets.
However, as noted above, rolling forecasts can cause goal congruence prob- lems for employees, as targets frequently change with each new forecast (Haka and Krishnan, 2005). This makes it increasingly difficult for employees to know what performance targets to aim for, and the use of rolling forecasts for performance evaluation can be difficult. Annual budgets are also more sui- ted to staff evaluation than rolling forecasts, as formal performance evaluation is most often conducted on an annual basis. Hence, the setting of annual evaluation targets based on annual budgets is more aligned. Although evalua- tion budget reasons are expected to be less important than planning and con- trol reasons, they will be more important for annual budgets than for rolling forecasts.
P3: Evaluation budget reasons are regarded as more important for annual budgets than for rolling forecasts.
The final proposition relates to whether the rolling forecast is a substitute for or complement to the annual budget. Extant research has shown that annual budget usage is high in organizations (Umapathy, 1987; Ekholm and Wallin, 2000). Practitioners have suggested that the rolling forecast addresses the predictive deficiencies of the annual budget (Bogiages, 2004), and many practi- tioner articles have argued that it should replace the annual budget. However, if rolling forecasts are used for different budget reasons, as presented in Proposi- tions 2 and 3, both budget forms may complement each other and coexist. It is also possible that both rolling forecasts and annual budgets may coexist in some circumstances where they are used for the same reasons. For example, the annual budget may be used for annual business unit evaluation, with rolling forecasts used for monthly or quarterly business unit evaluation. This leads to the following proposition.
P4: Rolling forecasts complement the annual budget.
3. Research method
3.1. Overview
The study used a cross-sectional mailed survey of senior management accoun- tants with a CPA qualification. The study represented collaboration between the University of Technology, Sydney and CPA Australia, which provided a grant to support the project, including access to its membership database.
3
The CPA Australia professional accounting body is one of the two largest
3 The grant investigated two related management accounting issues, resulting in an indus-
try report for CPA Australia members.
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accounting bodies in Australia, and comprises approximately 110 000 members around the world, across 92 countries. Given the accounting background of its members, the use of the CPA Australia members for studying budgeting was deemed appropriate.
3.2. Survey approach and sample
The cross-sectional survey was sent to 2400 respondents randomly selected from the CPA Australia membership. To explore the rolling forecast propositions, a reasonable number of rolling forecast users was required. As overall survey response rates could be around 20 per cent, and as Hansen and Van der Stede (2004) found that around 25 per cent of respondents use a rolling forecast, a large sample was needed to ensure a reasonable number of responses from both annual budget and rolling forecast users for statistical analysis. The sample selected from the CPA Australia membership database comprised members with senior managerial job titles (finance manager, chief financial office and financial controller), employed in medium and large organizations
4 or strategic business
units of larger organizations. Only one member was surveyed from any one organization/strategic business unit. For administrative convenience, the survey mail-out was conducted in two
stages, 6 weeks apart, with 1200 potential respondents in each. No organization in the first mail-out was a part of the second mail-out. For each mail-out, respondents were given 4 weeks to respond. A follow-up reminder postcard was then sent, encouraging participation. Follow-up respondents who required another survey copy were provided with a contact number to request the survey. In total, 424 respondents returned the survey, representing a raw response
rate of 17.7 per cent. To maintain consistency to the sampling rule of medium to large organizations, 41 respondents were excluded because they worked in organizations with less than 20 employees. Also, 52 respondents that did not provide any employee size information were discarded. This left a usable sample of 331 (13.8 per cent) organizations. Two hundred and ten (63.4 per cent) of these organizations used a rolling forecast. Therefore, the final sample was adequate to consider the propositions of interest in this study. The majority of respondents held senior financial positions in their organ-
izations. The three most common titles were financial manager/controller (134 respondents), commercial/business managers (38) and chief financial officers (30). The remaining respondents were predominantly middle-level managers, with a small number of financial/business accountants and analysts. The average length of service of respondents in their organizations was 7.65 years
4 This study only considers medium to large organizations. The Australian Bureau of
Statistics defines a medium organization by employee size to be no less than 20 employees.
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and the majority of respondents had been employed for more than 5 years. This indicates that respondents possessed the requisite knowledge to complete the survey. Finally, the average size of the organizations was 11 033 employees, ranging
from a minimum of 21 to a maximum of 430 000, with a median of 1000 (see Table 1). Most respondents were employed by larger organizations, with more than 90 per cent of the respondents in organizations with more than 100 employees. Furthermore, the industry distribution of respondents showed that a reasonable spread of organizations was observed from all 10 Global Industry Classification Standard (GICS) categories.
5
Table 1
Descriptive statistics for budget reasons
Mean Minimum Maximum Median Skewness SD
Annual budget: Importance of budget reason
Control of costs 5.87 1 7 6 –1.134 1.109
Board of directors’ monitoring 5.76 1 7 6 –1.471 1.202
Formulation of action plans 5.31 1 7 5 –0.832 1.270
Coordination of resources 5.26 1 7 5 –0.720 1.404
Business unit evaluation 5.16 1 7 6 –1.047 1.557
Encouragement of innovative behaviour 4.38 1 7 5 –0.322 1.572
Staff evaluation 4.29 1 7 5 –0.294 1.672
Management of production capacity 4.23 1 7 5 –0.362 2.104
Determination of required selling prices 4.01 1 7 4 –0.118 1.927
Provision of information to external parties 3.96 1 7 4 –0.127 1.971
Rolling forecast: Importance of budget reason
Board of directors’ monitoring 5.84 1 7 6 –1.697 1.353
Control of costs 5.82 1 7 6 –1.327 1.291
Formulation of action plans 5.57 1 7 6 –1.178 1.352
Business unit evaluation 5.18 1 7 6 –1.019 1.633
Coordination of resources 5.11 1 7 5 –0.671 1.497
Encouraging innovative behaviour 4.46 1 7 4 –0.340 1.729
Management of production capacity 4.22 1 7 5 –0.273 2.094
Staff evaluation 4.14 1 7 4 –0.161 1.794
Determining required selling prices 3.80 1 7 4 0.101 2.009
Provision of information to external parties 3.67 1 7 4 0.109 2.123
Other variables
Size 11 032 21 430 000 1000 7.307 38 797
SD, standard deviation.
5 For the rolling forecast sample, the average responding organization size was 13 078
employees (minimum 44; maximum 430 000; median 1100). As for the total sample, there was a reasonable spread of firms from all 10 GICS industry categories.
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3.3. Response and non-response bias measures
This study controlled for response and non-response bias by applying three elements of pretesting, follow-up procedures and non-response bias analysis to reduce response error, as recommended for survey research by Van der Stede et al. (2005). All questions developed for the survey were pretested (pilot) on senior academics, senior management accounting practitioners and CPA Australia staff. Drafts of the survey were sent to selected representatives of these three groups and their feedback was sought on areas for improvement, and incorporated where necessary. To test non-response bias, responses from the first half of the surveys
returned from each of the 1200 firm mail-outs were combined and compared to the latter half of responses.
6 The mean scores on all survey items for early and
late respondents were compared using independent sample t-tests. Only two of the 20 items tested showed significant differences.
7 This generally indicates that
the scores of the late respondents did not vary from the scores of the early respondents. In order to lend more strength to the testing, a second test checked for variation in the nature of the organizations themselves.
8 The industry distribu-
tion of organizations was wide, and varied consistently with the distribution of Australian organizations across the GICS industries, attesting to the representative spread of the respondent organizations.
4. Results and analysis
Ten operational reasons to budget were considered: six planning reasons, two control reasons and two evaluation reasons, as explained in the literature review. The importance of each budget reason was measured using a seven- point scale, with ‘1’ being ‘No Importance’ and ‘7’ being ‘High Importance’. Respondents were asked: ‘What are the main reasons for preparing the fixed period and rolling forecast, and how important are these reasons?’. Descriptive statistics (mean, minimum, maximum, median, skewness and standard deviation) of the importance of the 10 reasons to budget are provided in Table 1. Proposition 1 states that planning and control budget reasons may be regarded
as more important than evaluation budget reasons. The mean importance scores in Table 1 show that all 10 budget reasons are important for both the annual
6 Another option was to compare those who responded to the follow-up measures with
first mail out respondents. However, the number who responded after follow-up measures was very low and, therefore, this option was not viable.
7 The two differences were the two business unit evaluation reasons, for the annual budget
and rolling forecasts.
8 The industry distribution of the original 2400 sample firms could not be compared to
the distribution of the respondents, as the CPA Australia mailing list did not contain industry classifications. These were provided by respondents.
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budget and rolling forecasts, with all means greater than the scale midpoint of 3.5. The high means for nearly all 10 budget reasons indicate that there is a strong range of different uses to which respondents put budgets. Given that planning, control and evaluation budget reasons are all important, for Proposi- tion 1 to be accepted, the planning or control related reasons to budget should have higher mean importance scores than the evaluation reasons. The results in Table 1 show that the three most important budget reasons for
both annual budgets and rolling forecasts are planning and control reasons (‘control costs’, ‘board of director monitoring’ and ‘formulation of action plans’). For the annual budget, the fourth most important reason is also a planning reason (coordination of resources). The most important evaluation budget reason is business unit evaluation, ranked fifth for annual budgets and fourth for rolling forecasts. The staff evaluation budget reason, which is the focus of most existing budgeting research, is ranked seventh for annual budgets and eighth for rolling forecasts. Also, those planning budget reasons that ranked lower than business unit evaluation (encouragement of innovative behaviour, management of production capacity, determination of required selling prices, and provision of information to external parties) are generally similar in import- ance to the staff evaluation reason. Overall, this pattern of reason to budget mean importance scores would suggest that respondents perceived at least some planning and control budget reasons as more important than evaluation budget reasons in their organizations, and the remainder as no less important. This is confirmed by considering whether the mean importance scores of the
eight planning and control budget reasons are statistically different to those of the two evaluation reasons. Tables 2 and 3 report independent sample t-tests of differences in the mean importance scores of planning and control budget reasons and staff evaluation, and business unit evaluation reasons, respectively, for the full sample (‘all firms’ column), and for subsamples partitioned by three major organizational characteristics: organization size (large and small firms),
9
ownership form (listed and unlisted firms), and industry type (manufacturing/ retail and service industry).
10 These three organizational characteristics have
been shown in a range of studies to impact the use of management accounting
9 The proxy used for organization size is the log of the number of employees. The median
number of employees in the sample was 1000. Firms having equal to or more than this number of employees were classed as ‘large’ firms. The remainder were classed as ‘small’ firms.
10 Industry status was determined by a firms’ GICS code. The GICS categories classed as
manufacturing firms are: Energy, Materials, Consumer Staples, Industrials (excluding commercial services and suppliers, airfreight and logistics, airline, marine), Consumer Dis- cretionary (excluding hotels restaurants and leisure and media), Information Technology (excluding internet software and services, IT consulting and services, software). The Healthcare, Financials, Telecommunications Services, Energy and the above-named excluded subcategories were classed as service firms.
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techniques, such as budgeting (Bruns and Waterhouse, 1975; Sharma, 2002; Hansen and Van der Stede, 2004; Lang, 2008). The results in Table 2 show statistically significant differences between the
staff evaluation reason and the four most important planning and control
Table 2
Comparison of means: Planning/control versus staff evaluation reasons (Proposition 1)
Means and t-statistics
Annual budget All firms Large Small Listed Unlisted M/R Service
Control of costs 5.87 5.94 5.79 5.96 5.81 5.84 5.86
13.69*** 10.05*** 9.48*** 8.95*** 10.52*** 11.04*** 6.40***
Board of directors’
monitoring
5.76 5.85 5.69 5.89 5.68 5.76 5.77
12.45*** 9.13*** 8.63*** 8.17*** 9.55*** 9.99*** 6.30***
Formulation of action plans 5.31 5.25 5.37 5.31 5.30 5.28 5.41
8.40*** 5.13*** 6.80*** 4.78*** 6.99*** 6.79*** 4.27***
Coordination of resources 5.26 5.26 5.25 5.13 5.34 5.19 5.27
7.69*** 4.95*** 5.99*** 3.57*** 7.04*** 6.10*** 3.36***
Encouraging innovative
behaviour
4.38 4.49 4.26 4.48 4.31 4.32 4.54
0.61 0.493 0.44 0.23 0.65 0.66 0.10
Management of
production capacity
4.23 4.15 4.32 4.59 3.99 4.72 3.80
–0.43 –1.24 0.63 0.67 –1.01 2.65*** –2.61***
Determining required
selling prices
4.01 4.09 3.93 4.36 3.78 4.25 3.93
–1.97** –1.55 –1.16 –0.31 –2.16** 0.249 –2.21**
Provision of information
to external parties
3.96 4.15 3.77 4.42 3.67 3.82 4.14
–2.28** –1.24 –1.90* –0.08 –2.75*** –2.03** –1.48
Staff evaluation mean score 4.29 4.41 4.18 4.43 4.20 4.21 4.52
Rolling forecast
Control of costs 5.84 5.86 5.76 5.81 5.82 5.68 6.03
10.93*** 8.15*** 7.29*** 7.29*** 8.11*** 7.72*** 6.87***
Board of directors’
monitoring
5.82 5.76 5.96 5.96 5.75 5.81 5.85
10.91*** 7.41*** 8.06*** 7.80*** 7.63*** 8.27*** 6.03***
Formulation of action plans 5.57 5.50 5.68 5.59 5.56 5.72 5.35
9.19*** 6.07*** 6.98*** 6.06*** 6.88*** 8.33*** 3.95***
Coordination of resources 5.11 5.07 5.15 4.74 5.38 5.03 5.09
5.95*** 3.79*** 4.66*** 2.43** 5.87*** 4.41*** 3.01***
Encouraging innovative
behaviour
4.46 4.47 4.44 4.49 4.43 4.43 4.50
1.82* 0.91 1.68* 1.38 1.21 1.37 1.02
Management of
production capacity
4.22 3.92 4.60 4.10 4.31 4.70 3.57
0.39 –1.45 2.04** –0.15 0.658 2.38** –1.72*
Determining required
selling prices
3.80 3.80 3.79 3.84 3.77 3.98 3.63
–1.84* –1.99** –0.58 –1.14 –1.43 –0.60 –1.62
Provision of information
to external parties
3.67 3.88 3.40 4.28 3.20 3.57 3.90
–2.43** –1.58 –1.86* 0.47 –3.71*** –2.269** –0.81
Staff evaluation mean score 4.14 4.27 3.97 4.14 4.14 4.13 4.17
***p < 0.01, ** p < 0.05, *p < 0.10. Bold: planning/control reason significantly more important
than evaluation reason. Italics: planning/control reason significantly less important than evaluation
reason. M/R, manufacturing/retail.
862 P. Sivabalan et al./Accounting and Finance 49 (2009) 849–871
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T a b le
3
C o m p a ri so n o f m ea n s: P la n n in g /c o n tr o l v er su s b u si n es s u n it ev a lu a ti o n re a so n s (P ro p o si ti o n 1 )
t- st a ti st ic s (p la n n in g /c o n tr o l b u d g et
re a so n m ea n s re p o rt ed
in T a b le 2 )
A n n u a l b u d g et
A ll fi rm
s L a rg e
S m a ll
L is te d
U n li st ed
M a n u fa ct u ri n g
S er v ic e
C o n tr o l o f co st s
6 .4 8 * * *
4 .3 2 * * *
4 .8 8 * * *
4 .0 2 * * *
5 .1 5 * * *
4 .4 8 * * *
3 .2 5 * * *
B o a rd
o f d ir ec to rs ’ m o n it o ri n g
5 .3 8 * * *
3 .4 9 * * *
4 .1 2 * * *
3 .3 7 * * *
4 .2 4 * * *
3 .7 1 * * *
2 .9 6 * * *
F o rm
u la ti o n o f a ct io n p la n s
1 .2 9
– 0 .6 8
2 .3 0 * *
– 0 .2 3
1 .7 2 *
0 .4 6
0 .9 5
C o o rd in a ti o n o f re so u rc es
0 .8 2
– 0 .5 5
1 .6 0
– 1 .2 9
1 .9 2 *
– 0 .1 2
0 .2 1
E n co u ra g in g in n o v a ti v e b eh a v io u r
– 6 .1 6 * * *
– 5 .1 6 * * *
– 3 .7 1 * * *
– 4 .8 4 * * *
– 4 .1 8 * * *
– 5 .4 1 * * *
– 3 .0 5 * * *
M a n a g em
en t o f p ro d u ct io n ca p a ci ty
– 6 .1 5 * * *
– 6 .0 6 * * *
– 2 .8 7 * * *
– 3 .4 2 * * *
– 5 .1 9 * * *
– 2 .6 0 * * *
– 5 .3 6 * * *
D et er m in in g re q u ir ed
se ll in g p ri ce s
– 8 .0 7 * * *
– 6 .5 1 * * *
– 4 .9 7 * * *
– 4 .7 9 * * *
– 6 .5 7 * * *
– 5 .4 1 * * *
– 5 .0 5 * * *
P ro v is io n o f in fo rm
a ti o n to
ex te rn a l p a rt ie s
– 8 .3 0 * * *
– 6 .2 0 * * *
– 5 .6 3 * * *
– 4 .4 3 * * *
– 7 .1 4 * * *
– 7 .4 1 * * *
– 4 .3 8 * * *
B u si n es s u n it ev a lu a ti o n m ea n sc o re
5 .1 6
5 .3 5
4 .9 7
5 .3 5
5 .0 3
5 .2 1
5 .2 2
R o ll in g fo re ca st
C o n tr o l o f co st s
4 .3 7 * * *
3 .1 6 * * *
3 .0 2 * * *
3 .0 3 * * *
3 .2 3 * * *
2 .0 3 * *
3 .8 4 * * *
B o a rd
o f d ir ec to rs ’ m o n it o ri n g
4 .4 7 * * *
2 .5 0 * *
3 .8 5 * * *
3 .6 5 * * *
2 .8 4 * * *
2 .6 8 * * *
3 .0 1 * * *
F o rm
u la ti o n o f a ct io n p la n s
2 .6 5 * * *
1 .0 9
2 .6 9 * * *
1 .8 7 *
1 .9 4 *
2 .3 7 * *
0 .9 5
C o o rd in a ti o n o f re so u rc es
– 0 .5 1
– 1 .1 3
0 .4 5
– 1 .8 9 *
1 .0 2
– 1 .3 4
– 0 .0 1
E n co u ra g in g in n o v a ti v e b eh a v io u r
– 4 .3 9 * * *
– 3 .9 7 * * *
– 2 .2 3 * *
– 2 .8 7 * * *
– 3 .2 4 * * *
– 4 .1 6 * * *
– 1 .9 6 *
M a n a g em
en t o f p ro d u ct io n ca p a ci ty
– 5 .2 2 * * *
– 5 .9 3 * * *
– 1 .5 0
– 3 .9 6 * * *
– 3 .4 0 * * *
– 2 .6 0 * * *
– 4 .5 9 * * *
D et er m in in g re q u ir ed
se ll in g p ri ce s
– 7 .7 0 * * *
– 6 .6 3 * * *
– 4 .2 5 * * *
– 5 .3 6 * * *
– 5 .5 0 * * *
– 5 .6 6 * * *
– 4 .6 4 * * *
P ro v is io n o f in fo rm
a ti o n to
ex te rn a l p a rt ie s
– 8 .1 2 * * *
– 5 .9 4 * * *
– 5 .5 4 * * *
– 3 .3 1 * * *
– 7 .9 7 * * *
– 7 .2 4 * * *
– 3 .7 1 * * *
B u si n es s u n it ev a lu a ti o n m ea n sc o re
5 .1 8
5 .2 9
5 .0 4
5 .2 0
5 .1 7
5 .2 9
5 .0 9
* * * p <
0 .0 1 , * * p <
0 .0 5 , * p <
0 .1 0 . B o ld : p la n n in g /c o n tr o l re a so n si g n ifi ca n tl y m o re
im p o rt a n t th a n ev a lu a ti o n re a so n . It a li cs : p la n n in g /c o n tr o l re a so n
si g n ifi ca n tl y le ss
im p o rt a n t th a n ev a lu a ti o n re a so n .
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reasons (control of costs, board of director monitoring, formulation of action plans, and coordination of resources) (shown in bold) for both annual budgets and rolling forecasts. This finding is consistent across all three organization characteristics, indicating they do not impact the finding. The only variation of note is that smaller firms tend to regard nearly all planning and control budget reasons as of greater importance for rolling forecasts. This pattern of findings indicates strong support for Proposition 1, that budgeting for major planning and control reasons is of greater importance than the staff evaluation reason. For the business unit evaluation budget reason, the two most important
control reasons (control of costs, and board of director monitoring) are signi- ficantly more important than the business unit evaluation budget reason for annual budgets and rolling forecasts for the full sample and all six subsamples (Table 3). In addition, the third most important reason (formulation of action plans) is significantly more important than the business unit evaluation budget reason for annual budgets for smaller and unlisted organizations. This finding is stronger for rolling forecasts, with formulation of action plans significantly more important than business unit evaluation, for the total sample and for smaller, listed and manufacturing organizations. Finally, the fourth most important reason (coordinate resources) is more important than the business unit evalua- tion reason for the annual budget in unlisted organizations. Of relevance to Proposition 1 also is that the business unit evaluation reason was not considered of greater importance than any of the four most important planning and control reasons. This pattern of findings indicates support for Proposition 1, that bud- geting for major planning and control reasons is of greater importance than the business unit evaluation reason. Overall, Proposition 1 is upheld, as the pattern of results in Tables 1, 2 and 3
show strong support for the greater importance of budgeting for major planning and control reasons, relative to the two evaluation budget reasons. Variation in organizational size, ownership form and industry type do not significantly impact the acceptance of this proposition. Proposition 2 states that planning and control budget reasons will be more
important for rolling forecasts than annual budgets. For Proposition 2 to be accepted, the mean importance scores of at least a subset of the planning and control budget reasons need to be more important for rolling forecasts than for the annual budget. The results of independent sample t-tests are reported in Table 4.
11 For the eight planning and control budget reasons for the total sample
we found only one significant positive difference, for the formulation of action plans reason. Also, although not statistically significant, many t-statistic values were negative, indicating that the mean importance scores for those planning and control reasons was higher for the annual budget than for rolling forecasts,
11 A positive difference in the means (positive t-test statistic) indicates that the mean of
the budget reason for rolling forecasts was larger than the means of the equivalent budget reason for annual budgets.
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T a b le
4
C o m p a ri n g m ea n s: A n n u a l b u d g et
a n d ro ll in g fo re ca st (P ro p o si ti o n s 2 a n d 3 )
t- st a ti st ic
t- st a ti st ic
t- st a ti st ic
P la n n in g /c o n tr o l re a so n s (P ro p o si ti o n 2 )
t- st a ti st ic
(a ll fi rm
s) L a rg e
S m a ll
L is te d
U n li st ed
M a n u fa ct u ri n g
S er v ic e
C o n tr o l o f co st s
– 0 .4 5 2
– 1 .2 2 6
0 .5 7 7
– 1 .7 4 7 *
0 .8 0 0
1 .0 0 4
– 1 .3 9 2
B o a rd
o f d ir ec to rs ’ m o n it o ri n g
0 .7 0 1
1 .1 9 3
– 0 .0 2 9
– 0 .0 8 1
0 .9 7 3
0 .5 1 9
0 .1 9 5
F o rm
u la ti o n o f a ct io n p la n s
2 .2 6 4 * *
2 .8 7 8 * * *
0 .5 9 1
1 .1 7 5
1 .9 2 9 *
2 .3 5 0 * *
– 0 .0 2 5
C o o rd in a ti o n o f re so u rc es
– 1 .1 5 0
– 0 .8 5 6
– 0 .7 6 8
– 0 .7 8 4
– 0 .9 2 2
0 .1 2 4
– 1 .7 7 2 *
E n co u ra g in g in n o v a ti v e b eh a v io u r
0 .5 2 2
– 1 .5 2 9
2 .4 0 5 * *
– 1 .9 1 2 *
2 .0 2 1 * *
2 .2 0 5 * *
– 2 .2 3 9 * *
M a n a g em
en t o f p ro d u ct io n ca p a ci ty
– 0 .0 8 9
– 0 .8 1 2
0 .6 7 7
– 0 .7 9 8
0 .5 8 0
– 0 .9 9 3
– 0 .1 8 9
D et er m in in g re q u ir ed
se ll in g p ri ce s
– 1 .1 9 8
– 2 .4 1 1 * *
0 .6 8 2
– 2 .9 8 0 * * *
0 .6 7 9
– 1 .2 2 5
– 1 .3 6 3
P ro v is io n o f in fo rm
a ti o n to
ex te rn a l p a rt ie s
– 1 .5 6
– 1 .8 1 0 *
– 0 .4 1 2
– 3 .2 1 2 * * *
0 .4 0 2
0 .6 1 5
– 2 .5 6 7 * *
E v a lu a ti o n re a so n s (P ro p o si ti o n 3 )
S ta ff ev a lu a ti o n
0 .9 5 9
1 .2 4 4
0 .1 3 0
1 .3 7 5
0 .1 3 0
0 .9 0 5
2 .8 6 5 * * *
B u si n es s u n it ev a lu a ti o n
– 0 .1 8 4
1 .5 8 1
– 1 .7 5 3 *
0 .2 3 9
– 0 .4 5 8
0 .8 3 3
1 .6 0 9
* * * p <
0 .0 1 , * * p <
0 .0 5 , * p <
0 .1 0 . B o ld : si g n ifi ca n t d iff er en ce
b et w ee n a n n u a l b u d g et
a n d ro ll in g fo re ca st im
p o rt a n ce .
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which is the reverse of the Proposition 2. Also, none of the organizational characteristics subsample analyses provide any strong support for Proposition 2. There are no instances in any subsample of a clear pattern of significant positive differences for the mean importance scores for rolling forecasts over annual budgets. The strongest pattern of significant differences was for listed firms and services organizations. However, there are four significant negative coefficients for listed organizations and three significant negative coefficients for service orga- nizations, which suggest the opposite to Proposition 2; that is, that planning and control budget reasons were more important for annual budgets than rolling forecasts.
12 Based on the pattern of findings in Table 4, there is insufficient
evidence to accept Proposition 2. Overall, the pattern suggests there are no differences between planning and control budget reasons for rolling forecasts and annual budgets. Proposition 3 states that evaluation budget reasons will be more important
for annual budgets than rolling forecasts. Independent sample t-tests of the differences in the mean importance scores for the total sample and the three organizational characteristic subsamples are reported in Table 4.
13 No statisti-
cally significant difference was found between the scores for the staff and business unit evaluation reasons for the full sample. However, the subsample analysis reveals that service industry firms regard the ‘staff evaluation’ budget reason as more important for annual budgets than rolling forecasts, consistent with Proposition 3. There is no a priori reason to suggest why Proposition 3 would hold only for service firms. Given the lack of support for the proposition across the other analyses, this finding may be spurious. Overall, Proposition 3 is rejected, as no relationship was found for the full sample or for five of the six subsamples. Proposition 4 relates to whether rolling forecasts complement the annual
budget. Table 5 reports the frequency of use of annual budgets only, rolling forecasts only, both annual budgets and rolling forecasts, and neither, for total respondents and for the three organizational characteristics subsamples. These results show that the majority (60 per cent) of the respondents jointly use annual budgets and rolling forecasts. Use of an annual budget only is the next most common practice (34 per cent), but is substantively lower than joint use. This pattern is consistent across all three organizational characteristics (54 per cent or greater across all six subsamples for joint use, and 38 per cent or less for
12 The only potential indication of support for Proposition 2 is the two positive significant
differences for manufacturing organizations contrasted with the three negative significant coefficients for service organizations. This suggests manufacturing organizations may favour Proposition 2 while service organization may favour the opposite. However, these differences seem to be marginal.
13 A positive difference in the means (positive t-test statistic) indicates that the mean of
the budget reason for the annual budget was larger than the mean of the equivalent bud- get reason for rolling forecasts.
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annual budgets only). Joint use of annual budgets and rolling forecasts is substantively higher among large (66 per cent) and listed (67 per cent) organi- zations. This pattern of results indicates that the use of both annual budgets and rolling forecasts is the dominant practice among respondents. Overall, this indi- cates support for Proposition 4 for the total sample and all three organizational characteristic subsamples. Although it is possible for different budget forms to be used for different
reasons and remain complements, our study found that the reasons for conducting rolling forecasts are not different from those for using an annual budget. The few practitioner and academic articles comparing both have argued for rolling forecasts to be effective for planning and control, and less effective for evaluation, while annual budgets continue to be used for evaluation, due to their alignment to the annual reporting cycles (Haka and Krishnan, 2005). Alternatively, both may be used for the same reasons but across different time horizons. For example, annual budgets may assist organizations to evaluate business units yearly, while rolling forecasts are used to evaluate monthly or quarterly. Rolling forecasts may be used for the provision of information to external parties quarterly, while annual budgets provide the same information yearly. The annual budget remains important for longer term planning and control, while the rolling forecast may be regarded as important for short-term planning and control.
5. Summary and conclusions
This study investigated why budgets continue to be used, though they are frequently criticized in the literature. Two arguments were considered. The first is that companies use budgets for planning and control, while budget criticisms and research focus on evaluation. The second is that rolling forecasts have assisted the annual budgets’ control function, reducing common bases of criticism. The findings indicate strong support for the first argument. A subset of plan-
ning and control budget reasons was more important than both the business unit
Table 5
Frequency of rolling forecast users among subsamples
All firms
(%)
Large
(%)
Small
(%)
Listed
(%)
Unlisted
(%)
Manufacturing/
Retail (%)
Service
(%)
Annual budget only 111 (34) 44 (26) 67 (41) 34 (26) 77 (38) 63 (32) 37 (34)
Rolling forecasts only 11 (3) 8 (5) 3 (2) 5 (4) 6 (3) 10 (5) 1 (1)
Annual budgets and
rolling forecasts
199 (60) 111 (66) 88 (54) 87 (67) 112 (56) 115 (59) 68 (62)
Neither 10 (3) 4 (2) 6 (4) 4 (3) 6 (3) 7 (4) 3 (3)
Total 331 167 164 130 201 195 109
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evaluation budget reason and the staff evaluation budget reason, for annual budgets and rolling forecasts. These findings appear to be consistent across large and small, listed and unlisted, and manufacturing/retail and service organi- zations. Two planning/control reasons (control of costs and board of director monitoring) were consistently more important than the staff evaluation and business unit evaluation reasons, while another two planning/control reasons (coordination of resources and formulation of action plans) were also more important than the staff evaluation reason for annual budgets and rolling forecasts. Given our findings, future research should give greater emphasis to the use
of budgets for planning and control reasons. One way of achieving this may be to broaden the way we measure existing budget variables. Many variables are measured solely from an evaluation perspective (e.g. budget emphasis is measured using the budget evaluative style measure). These measures could be expanded to include planning and control reasons. The study did not find that planning/control reasons were more important for
rolling forecasts than annual budgets (Proposition 2), for the full sample and four of the six subsamples. The only two subsamples showing this relationship were unlisted firms and manufacturing firms. The study also did not find evalua- tion reasons to be more important for annual budgets than rolling forecasts (Proposition 3), for the full sample and five of the six subsamples. The only subsample showing this relationship was service industry firms. Also, it was observed that budgets are regarded as more important for business
unit evaluation than staff evaluation. This finding is important, as the staff evaluation reason is the basis for defining and theorizing relationships between key budget variables such as budget participation and budget emphasis, in extant literature. The findings from this study indicate that research should also consider business unit evaluation in defining and theorizing these variables. In relation to the second argument, the findings indicate support for the role
of rolling forecasts in assisting annual budgets in organizations. Unlike the claims of some practitioner studies however, rolling forecasts have not sub- stituted for the annual budget. They are used in addition to the annual budget and for the same operational reasons as the annual budget. This finding was unexpected. Practitioner commentaries had criticized annual budgets as a prediction device in longer-term environments, but acknowledged their continued relevance for annual evaluation. Also, research has shown that rolling forecasts may provide goal congruence problems if used for evaluation, but were an effective source of organizational learning (planning and control). Therefore, rolling forecasts had been argued to be more important for planning and control budget reasons, and the annual budget for evaluation budget reasons. The similarity in the importance of budget reasons found in this study may suggest that organizations use both budget forms to obtain the same types of outcomes, but for different time horizons. This represents an area for future budget research to explore. Limitations to this study, related to the concepts and variables studied and the
survey method adopted, require acknowledgement. The first limitation is the
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10 operational budget reasons collated from the investigation of practitioner and academic literatures. It is possible that other important operational budget reasons exist. We also considered responses from strategic business units and whole organizations similarly. Although not expected to be significant, differ- ences in the budgetary controls that arise from these two structures have not been considered. The classification of the 10 operational budget reasons into planning, control
and evaluation reasons is based on the researchers’ judgement, determined by considering whether a budget reason is relevant in the preperiod (planning), intraperiod (control) or postperiod (evaluation) phase of budgeting. To this extent, it is possible that other researchers may have classified these operational reasons differently. This study also assumed a strong positive correlation between the importance of a budget reason and its use in practice. Therefore, the terms ‘importance’ and ‘use’ are applied interchangeably. Organizations that do not observe a positive correlation between the importance of a budget reason and its use for the same reason may find our results and analyses less relevant. There are a range of limitations relating to the survey method which need to
be acknowledged. First, consistent interpretation of questions by different respondents may be questioned. However, these differences may be argued to be randomized by the large number of respondents in the usable sample (331). The scale used in this study is ordinal and not continuous, and the use of common descriptive statistics such as the ‘mean’ and ‘skewness’ score may be questioned. However, this form of analysis has been frequently used in survey research and, therefore, is considered acceptable. The study also used results from independent sample t-tests, which do not assume equal variances to allow for the possibility that data distribution may not be symmetrical. Despite these limitations, this study has contributed to the literature by showing
that a range of planning and control operational budget reasons are regarded as more or equal in importance than the evaluation reasons currently focused upon in budget research. The findings from this paper provide avenues for research to explore alternative operational budget reasons more comprehensively. Also, this study did not consider the strategic budget reasons discussed by Hansen and Van der Stede (2004). Future research into these reasons will contribute to a better understanding of budget reasons in organizations. Given that a majority of organizations find planning and control budget
reasons more important than evaluation budget reasons, and that evaluation has been shown to cause problems within organizations, further research should try to understand how organizations successfully mitigate these evaluation prob- lems. Such research could address how organizations complement budgeting with other management control systems to allow efficient operations. Similarly, future research should aim to understand the key problems when using budgets for planning and control, and how to mitigate these. Such a research agenda would also have managerial relevance.
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