Research on Present Situation of Budgetary Slack in Chinese Enterprise

Research on Present Situation of Budgetary Slack in Chinese
Enterprise
ZHANG Shuangcai1, ZHOU Wenjun 2
1. School of Management, Hebei University, P.R.China, 071002
2. School of Management, Dalian University of Technology, P.R.China, 116024
[email protected]
Abstract: In order to have a profound and comprehensive understanding of the present budgetary slack
in the enterprise, we specially designed a questionnaire and carry on the investigation in 44 enterprises.
The questionnaire includes several parts in order to analysis the present situation of budgetary slack in
Chinese enterprise, which are budgeting function, budgeting goal, budgeting participation and
communication, budgetary slack behavior, information asymmetry and so on. Based on this, the article
describes the conclusion: Chinese enterprise must take budgetary slack problem in a high position.
Because various steps of the majority enterprises have the factors which urge budgetary slack existing,
regardless of the budgetary establishment, the budgeting control, as well as finally the performance
evaluation and the way of reward, and so on .
Keywords: Budgeting management, Budgetary slack, Participative budgeting, Information asymmetry
1 Introduction
As defined by Dunk & Nouri (1998), “budgetary slack” refers to the intentional underestimation of
revenues or productive capabilities and /or overestimation costs or resources when completes budgeted
task. This definition summarizes comprehensively to the content of budgetary slack, and it is clear that
the time of slack occurring is “completing a budget task”.
In the literature of discussion the influence factors to budgetary slack, participative budgeting always
was the key (Young, 1985). But in the literature, the field study result of participative budgeting and
budgetary slack was not actually consistent, which concealed the relationship between participative
budgeting and budgetary slack was not simply linear, but was received the influence by other factors
(Govindarajan,1986; Dunk,1993; Dunk,1995). This kind of variable contained the budgeting emphasis
Merchant,1985; Young,1985;Dunk,1993
, environment uncertainty Govindarajan,1986 task
uncertainty Hirst,1981 , Organization factors Lukka,1988 , the Possession of Information
Merchant
1985; Dunk, 1993; Young 1985 and so on.. But present concerning the tendency
question about participative budgeting and budgetary slack, the scholars still don’t have the consistent
findings.
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2 Research on Present Situation of Budgetary Slack in China
In order to have a profound and comprehensive understanding of the present budgetary slack in the
enterprise, we specially designed a questionnaire and carry on the investigation in 44 enterprises. The
questionnaire includes five parts which are budgeting goal, participative budgeting, budgetary slack,
information asymmetry, and budgetary effectiveness. Budgeting goal is a factor which measures the
degree of budgetary slack in enterprise. The other three parts including participative budgeting,
information asymmetry and budgetary effectiveness are the important causes of budgetary slack.
Therefore, research on these three parts is a good method to investigate whether the enterprises in our
country have the motivation or likelihood of budgetary slack.
2.1 Budgeting Function
As the main method of management control system, the function of budgeting is restricted by a certain
of factors. But which are the factors actually, is an important part of budgeting management research.
We analyzed the budgeting function from three aspects: the overall flow, including the assignment, the
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control, and the evaluation, the motivation to subordinate as well as the level of superintendent.
A. The function to the whole enterprise
About the function of budget, the manner of various leaders is basic consistent. They all think budget is
in an extremely important position in the enterprise. First, budget can take the method of resource
distribution; Next, budget can be as the method of defining goal; Once more, the function of budget also
manifests in the control method; Finally, the budget also can take the method of achievement evaluation.
B. The function to motivate to subordinates
Accompanied by designing question, the questionnaire has also considered the demand degree of
subordinate to each motivational factor. On this basis, it is advantageous to design the effective
motivation mechanism for controlling the budgetary slack in the enterprise. First, the most important
obtained by the subordinates is the sense of achievement during working. This factor motivates to
subordinates the most intensely, due to 83% target entities approve the viewpoint; Next, the feeling of
working satisfaction also has important motivational function to the subordinate, because 72% target
entities indicate supporting this viewpoint; The last motivational factor that obtains general acceptance
is the self-growth and the development of subordinate leaders, 71% target entities express approval.
Regarding the questionnaire result, various enterprises in our country hold the same manner to the
motivational factors basically. They generally think the non-material factors, such as the sense of
achievement, the feeling of satisfaction, and the self-growth and development, have motivational
function to promote and standardize subordinate's working effectively.
C.The function to superintendents
On the top management point of view, budget also is an important factor to motivate them. First, 60%
target entities approve “budget can make the superintendent to be rich in innovation spirit”; Next, nearly
80% target enterprises think “budget may cause the superintendent to become better”. Concerning to the
investigation result, the budget has a positive effect to improve the achievement and ability of
superintendents, and an effective budgeting mechanism can help them to become better managers.
2.2. Budgeting Goal
A. The difficulty of budgeting goal
About this part, 91% target enterprises state that their budgeting goals are not easy to realize, but all of
the enterprises think the budgeting goal may realize after certainly diligent working. Based on this, it
can explain that our country’s enterprises set the target in a relatively difficulty degree in the process of
budget formulation.
B. The revision situation of budgeting goal
According to the data which we investigated the revision situation of budgeting goal in the enterprises,
the two items which get the most approval are “within the budgeting year, the budgetary target can not
be revised”, “the target can not modify generally, only if the basic assumptions had tremendous changed,
so that the meaning of the budget has been out of control”, their desired values also were relative highest,
the proportion which agreed budget was difficult to modify or did not revise, reached separately as high
as 84% and 83%.They have represented the major point about this question. In conclusion, the
budgeting goal cannot be revised basically.
2.3 Budgeting participation and communication
Regarding budgetary participation study, we divide the topic into two kinds according to behaviour
obligation: participation and communication
A. Budgeting participation
Through comprehensive comparison of all of the data of the answer to subject, there are six questions
receive the highest discrete degree and desired value in the nine questions, moreover, the most choices
are in the agreement side. The numbers of desired value respectively are 93%, 95%, 90%, 86%, 88%,
86%.The six questions are “when has the problem, even if the top management does not request, I also
discuss with him on own initiative”, “in the budgeting conference, I propose the method of solution
business problem frequently, but not only discuss budget questions ”, “my leaders listen attentively to
me to improve budget and enhance the efficiency”, “the disadvantageous difference receives more
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attention from leaders compared to the advantageous difference”, “I attend the conferences about
budget variance analysis which only the managers can participate in”, “in this unit, myself individual
interest was considered as far as possible” . Without a doubt, these six questions all support the
subordinate participates in the process of budget formulation by high proportion. On the basis, obviously
the individual managers have relatively high willingness to participate in budget establishment, and are
willing to participate in the management policy making process on the formulation of departmental
budge in enterprise.
B. Budgeting communication
In this aspect, the data of investigation display that the two questions which are “I discuss with
subordinate on establishing departmental budget” and “I discuss budget frequently with the corporation
financial staff” have the highest discrete degree and desired value, the numbers of desired value
respectively are 94%and 95%. The result can explain that these two contents are exist universally in Our
country Enterprise; Compared with above two items, the discrete degree and desired value of the two
below questions are low, which are “l am willing to discuss and construct budget establishment together
with the divisional manager of other financial departments”and “I communicate with the top
management to establishing departmental budget”. In other words, on the view of each superintendent of
subordinate enterprise, they are more in favor of communication with subordinate and the financial staff
in the unit, rather than the top management or the divisional manager in other financial departments;
And then considering the item which is “I discuss with the top management on how to realizes the
budgeting target ” has relatively high discrete degree, we are not difficult to promote that high-level
leaders in subordinate enterprises are in favor of communication with this unit interior during budget
formulation. On the contrary, in the realization aspect, they show a tendency to discuss with the leaders ;
In addition, due to the question which is “even if don’t have the disadvantageous budgeting difference, I
also frequently discuss budget things with the top management” has the lowest discrete degree, finally
we can get the conclusion: in communication aspect, the divisional managers are not eager to keep
daily communicate with the leaders, unless there is disadvantageous budgeting difference.
2.4 Budgetary slack behavior
Regarding the investigation on budgetary slack, we concentrate on the purpose of budgetary slack, and
choose to analyze the question from the behavior angle, and search which behavior factors are
influential on slack.
A. he purpose of budgetary slack
Concerning the purpose of budgetary slack, we have carried on the choice from five factors. First, the
discrete degrees of the two purposes are low, which are “during good economic situation, the
superintendent may accept reasonable budgetary slack” and “in order to use the idle cash”. Moreover,
for the preceding item, the attitude mainly concentrates on neutral or approval manner, nearly 30%
target enterprises express approval, 40% of them express neutrality. Through the data, we can find out
the superintendents comparably approve of this as the reason for budgetary slack .On the contrary,
although the latter item has low discrete degree, the attitude concentrates on the neutral manner, 42%
target entities express neutrality, the number of the enterprises which express approval or opposition
directly are few. On this basis, we consider that the superintendent generally think this item is not
related with budgetary slack .Next, the discrete degree of the item which is “the superintendents
establish two kinds of standards in order to insure” is in the mid-position. But the attitude to this item
mainly concentrates on neutral or approval manner, nearly 28% target enterprises express approval, 25%
of them show neutrality. Therefore, “in order to insure” also easily lead to the budgetary slack. Finally,
regarding “in order to protect themselves, the superintendents may submit the budgeting target which is
easy to realize” as well as “the superintendents can use budgetary slack in realizing the item which
cannot be authorized through the official method”, the discrete degrees of them are high. Moreover, for
the preceding item, the proportions of superintendents who hold opposed or supported manner are
separately 23% and 26%; For the latter item, the proportions are respectively 25% and 34%. From the
data, we can summarize that superintendent's attitude is not unified to these two items in Our country
Enterprise, the difference is very big, and it is in the evenly matched situation basically.
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B. The budgeting pressure on subordinate unit's
There is an issue that all of enterprises basically hold the same thought. It is the subordinate should
place the company’s benefit on the key. But regarding the issue that “in order to enhance the efficiency
and control cost, it should take the departmental budgeting target on a very tense level”, various
enterprises hold different manners. 24% target enterprises have the opposing opinion, they think the
budgeting standard should be tolerant. Contrarily, 34% other enterprises express approval.
C. The condition of top management using budget
According to the questionnaire, all of enterprises pay attention to the condition of using budge.
Especially, the two items get approval by above 70% target entities, which are “top management make
decision according to the budget” and “emphasize on reduce cost”. But when we link budgeting target
with the achievement appraisal, the attitudes are difference. Above 40% enterprises expresses approval,
and above 40% of other enterprises shows neutrality.
D. The general attitude to budget
On this issue, the investigated enterprises do not coincide in opinion, choice is relatively diverse. 58%
enterprises believe the budget first is an accountant tool, and achieving the target diligently is a
gambling. 21% enterprises hold contrary manner. And 21% enterprises express neutrality. Generally,
they have an opinion in common that the budget is a gambling process, and budget establishes in the
process of gambling between upper and lower layer. As a result, this will provide the condition for the
budget deviating from the actual situation.
E. The budgeting relevance
Concerning to this issue, most leaders choose the consistent answer, all of they think the budget has a
vital role in the enterprise. First, above 60% enterprises approve that its department's budget standard
can cause high level of efficiency. Moreover, nearly 70% enterprise leaders are not willing to work in an
environment which has no budget datum. Finally, the viewpoint which is “if the enterprise has no budget
datum, emphasized efficient work as far as possible can cause the efficiency to be higher” does not be
approved by the majority of leaders. Through analyzing the questionnaire, we can conclude that the
majority of leaders pay attention to the function of budget in various aspects, such as the efficiency and
so on .Thus, budgeting is taken more seriously, applied more extensively in our country.
2.5 Information asymmetry
Target enterprises treat this issue towards a unified approach that the information asymmetry is
prevalent in enterprises.
A. Information of official duty in subordination scope
About the activity in subordinate scope of official duty, the choice of superintendent concentrates on
“the subordination has higher amount of information”. 62% target enterprises accept that the
subordination has higher amount of information, 27% of them choose the item that the top management
and the individual manager have equal amount, only 11% enterprises think the top management grasps
higher amount of information. Without a doubt, the result can reflect subordination obtains higher
amount of information of activity in his own scope of official duty in our country enterprise.
B. Information of the investment and return in subordination scope
On this issue, the situation is the same with the item above mentioned. The leaders also think the
subordination has higher amount of information. 72% enterprises agree to this view. But 19% of them
choose the item that the top management and the individual manager have equal amount, only 9%
enterprises think the top management grasps higher amount of information. Similarly, it is certain that
subordination obtains higher amount of information of the investment and return in his own scope in our
country enterprise.
In conclusion, there is information asymmetry between the two phenomena in our country enterprises.
The top management is unable to obtain the equally amount of information of many aspects with
subordinate, such as subordination's work, behavior and so on. Therefore, it will be possibility to lead to
the phenomenon that subordination draw up budgetary slack, but the top management is unable to
discover.
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3 Summary of the Questionnaire
Through analyzing the questionnaire, the final conclusions can be drawn as follows:
First, accompanied by increasing attention to budget from business community and academia in our
country, budget has gained enterprises' approval of the positive function in the process of business
management and standardization. Basically, each enterprise approves that the budget can be the measure
to resource assignment, the goal determination, control, as well as performance evaluation. Therefore it
causes the leaders to emphasize budgeting goal. Moreover, the top management mainly appraises
subordinate's achievement through the situation of completing budgeting goal. In addition, the top
management pays attention extremely to the explanation of budgeting difference, and also frequently
reminds the subordination to accomplish budgeting goal. Without a doubt, the importance of budget will
give the subordination pressure. Except for this, on the psychological point of view, the sense of
achievement and satisfaction after completing the budgeting goal is one kind of demand. Based on those
factors above mentioned, subordination should hope to establish standard which is easy to realize. As a
result, this will cause the subordination to underestimate the profit as far as possible when draw up
budgeting goal, thus provide the subordination the power of making budgetary slack.
Next, the superintendent hold positive attitude to participate in the budget establishment, and they are
willing to participate in the management policy making process on the formulation of departmental
budget.Through the investigation, regarding this unit's budget revision, the top management generally
can give reasons to the subordination. This result can express that subordination have an important
influence on the budgeting establishment. Thus, it gives subordination an opportunity to overestimate
cost and underestimate income, finally creates the possibility of making slack.
Once more, basically budgeting goal cannot revise in our country enterprises, and superintendents pay
attention to the deviation on intermediate stage, the degree of tolerance is low. In addition, request the
subordination to provide the report, including budgeting contrast on intermediate stage, as well as the
reasons of budgeting difference. Therefore, in order to guarantee the budgeting goal can complete on
time, the subordination will be in favor of reserving a certain of undulation space when make budgeting
goal. Obviously, the emphasis on completing budgeting goal has also provided the pressure for the
subordination to make budgetary slack.
The other factor related is information asymmetry which universally exists in our country enterprise. It
is manifested by the phenomena below: The data displays that leaders in the enterprises are willing to
discuss and construct budget together with the divisional manager and financial departments. On the
contrary, unless there is disagreement in the communication which has negative impact on the budgeting
plan, the divisional managers are not eager to keep daily communicate with the leaders. The leaders
think in opinion that the purpose of budgeting communication is to control instead of share information.
In conclude, the budgeting communication is the unilaterally request. Without a doubt, the top
management is unable to obtain the equally amount of information of many aspects with subordinate,
such as subordination's work, behavior and so on. Therefore, it will be possibility to lead to the
phenomenon that subordination draw up budgetary slack, but the top management is unable to discover.
Finally, there are most surveyed management agree that the monetary incentives is mainly linked with
budget completion. And both of the upper and lower superintendent have the pressure to achieve the
budgeting goal, otherwise it will influence on their prestige, and monetary payoff .Thus they have the
power to make budgetary slack. In order to overfulfill the budgeting goal in the end of the period easily
and therefore obtain more rewards, the leaders establish budgeting goal which is easy to realize through
underestimate income, and overestimation cost.
4 Conclusion
Obviously, there are factors which urge budgetary slack to be made in the whole process, regardless of
the budgetary establishment, the budgeting control, as well as finally the performance evaluation and the
way of reward, and so on. Moreover, accompanied by increasing affirmation of budgeting in enterprises
from business community and academia, budgeting has gained increasing attention, more and mort
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Chinese enterprises will adopt budgeting management. Therefore, how to reduce the degree of
budgetary slack in the budgeting system, also become the important topic which urgently needs us to
study.
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