The need for several measures of performance
Whilst the use of standard costs and variable budgets play an important role in the control of activities and in the evaluation of performance, undue attention to cost control tends to diminish the importance of other goals. For example, a factory manager is expected to maintain a high level of productive efficiency, to maintain the quality of the product, to meet production schedules on time, to minimize expenses and to maintain satisfactory relations with employees.
The evaluation of performance, therefore, requires both quantitative and qualitative measures of performance. It is evident that some organizational and departmental goals may conflict, such as for example the need to minimize costs and to maintain product quality. Emphasis on specific goals, therefore, will mean that other goals may not be attained. The objectives of performance evaluation, which we have stipulated, require a balanced view of performance covering the various areas of managerial responsibility. If management uses only conventional measurements of revenues, expenses, profit, cost variances and output, it is possible that short-run economic gains may be achieved at the expense of long-run goals. The failure to appreciate the impact of control techniques on individuals responsible for organizational activities may adversely affect employee morale, loyalty, trust and motivation.
The importance of participation
The active participation by managers in the planning process not only enhances their personal sense of involvement in the organization, but improves the efficiency of the planning process. Moreover, such participation establishes a common understanding of purpose, and promotes the acceptance of organizational objectives and goals at all levels. Likewise, the control process is aided by the active participation of managers in the investigation of variances, the evaluation and selection of appropriate solutions and the development of related policies.
The degree of effort expended by members of an organization in attempting to achieve designated goals is particularly dependent upon their personal aspiration level. The aspiration level may be defined as that level of future performance in a familiar task, which an individual explicitly undertakes knowing his past performance level (Stedry, 2000). For example, a manager's aspiration level as regards costs is the spending level which he accepts as realistic and with which he will strive to comply. Hence, we may identify three potential levels of cost performance (Welsch, 2001):
(1) the budgeted level
(2) the aspiration level
(3) the actual level.
Since the aspiration level is the real inner goal acceptable to the manager, the purpose of participation is to bring the aspiration level in harmony with the budgeted level (or vice-versa). Clearly, a budgeted level which is significantly at variance with the aspiration level will have a negative effect on managerial behaviour.
It follows that managers should be motivated and not pressurized into achieving their budgetary goals. This may be achieved by recognizing the importance of aspiration levels in the planning stage and the timely communication of results as a basis for improving performance, where necessary. The purpose of participation in the control process, therefore, is to motivate managers and to generate in each participant the desire to accomplish or even improve his level of performance.
The budget process which involves defining areas of responsibility, measuring and comparing performance accordingly, concentrates the manager's entire attention on his own department. The tendency to departmental self-centredness which is thus encouraged obscures the important relationships between departments, so that inter-departmental dependencies may be ignored or overlooked in the quest for optimizing departmental results. Consequently, economies which would result from greater inter-departmental collaboration may be lost to the organization.
The stifling of initiative
The... see: Departmental Self-centredness