On the bottom of page 353/top of page 354, the textbook discusses Behavioral Effects of Budgets. Summarize what's being said in that section, paying special attention to the Spotlight on Ethics. BEHAVIORAL EFFECTS OF BUDGETS Although budgets are intended to motivate employees to work hard to achieve the organization's goals, they can sometimes create unintended effects. The way in which managers and employees behave in response to budgets depends, in large part, on how goals and budgets are set. Two considerations are especially critical: the Page 354 relative difficulty of meeting goals and the degree of employee participation in establishing goals. In setting budgetary goals, finding the right level of difficulty is key. Research suggests that budgets that are tight but attainable are more likely to motivate people than budgets that are either too easy or too difficult to achieve. Think about your own personal goals. If the goal is too easy, you will not have to work very hard to achieve it. If you set your goal too high, however, you may quickly become frustrated and give up. Similarly, managers must try to find the just-right level of difficulty in setting budgetary goals so that they have motivating rather than demotivating effects on employee behavior. Involving employees at all levels of the organization in the budgeting process is also important. Participative budgeting allows employees throughout the organization to have input into the budget-setting process. This bottom-up approach to budgeting can be contrasted with a top-down approach in which top management sets the budget and imposes it on employees throughout organization. In general, a participative approach is more likely to motivate people to work toward an organization's goals than a top-down approach. One downside to participative budgeting is that employees may try to build a little extra cushion, or budgetary slack, into their budgets. They can do so by understating expected sales or overstating budgeted expenses, making it more likely that they will look good by coming in under budget for expenses or over budget for revenues. Budgets can also create a use-it-or-lose-it mentality that encourages managers to spend their entire budget to avoid a reduction in resources the next budget period. Many of these dysfunctional behaviors can be minimized by implementing the following budget-setting guidelines: Use different budgets for planning than for performance evaluation. Although budgetary slack can make planning difficult, it provides a way for managers to hedge against uncertainty, or future events they may not be able to anticipate or control. Some budget slack can be beneficial, particularly in organizations that face major fluctuations in demand or costs that are beyond the manager's control. Use a continuous, or rolling, budget approach. Under continuous budgeting, the company maintains a rolling budget that always extends a certain period into the future. When one budget period passes, another is automatically added at the end. This approach keeps managers in continuous planning mode, always looking into the future, and helps avoid the budget games that are sometimes played at the end of a budget period. Use a zero-based budgeting approach. Under zero-based budgeting, the entire budget must be constructed from scratch each period rather than using last period's budget as the starting point. While time-consuming, it makes managers justify their budget each year and can help control unnecessary spending. SPOTLIGHT ON ETHICS Playing Budget Games Managers who are evaluated and rewarded for meeting budgetary goals may engage in game playing. For example, a sales manager who has reached his or her sales quota for the week may try to defer sales to a future period by telling customers to come back later to make their purchase. Managers may even be tempted to postdate orders so that they appear to have been made in a different time period. Alternatively, a salesperson who has not met his or her quota may cut prices at the end of the period to increase sales volume and meet the sales goal. By engaging in these tactics, managers are putting their own self-interest ahead of the organization's objectives. Although the complete elimination of such budget games is difficult to achieve, organizations must try to design their budgets and control systems to minimize these dysfunctional behaviors. As this discussion indicates, managers must take a variety of behavioral factors into account in designing and implementing a budget system. There is not a one-size-fits-all solution to budgeting. The best approach Page 355 depends on the nature of the business environment, type of organization, and tasks that managers must perform within the organization. On the bottom of page 353/top of page 354, the textbook discusses Behavioral Effects of Budgets. Summarize what's being said in that section, paying special attention to the Spotlight on Ethics. BEHAVIORAL EFFECTS OF BUDGETS Although budgets are intended to motivate employees to work hard to achieve the organization's goals, they can sometimes create unintended effects. The way in which managers and employees behave in response to budgets depends, in large part, on how goals and budgets are set. Two considerations are especially critical: the Page 354 relative difficulty of meeting goals and the degree of employee participation in establishing goals. In setting budgetary goals, finding the right level of difficulty is key. Research suggests that budgets that are tight but attainable are more likely to motivate people than budgets that are either too easy or too difficult to achieve. Think about your own personal goals. If the goal is too easy, you will not have to work very hard to achieve it. If you set your goal too high, however, you may quickly become frustrated and give up. Similarly, managers must try to find the just-right level of difficulty in setting budgetary goals so that they have motivating rather than demotivating effects on employee behavior. Involving employees at all levels of the organization in the budgeting process is also important. Participative budgeting allows employees throughout the organization to have input into the budget-setting process. This bottom-up approach to budgeting can be contrasted with a top-down approach in which top management sets the budget and imposes it on employees throughout organization. In general, a participative approach is more likely to motivate people to work toward an organization's goals than a top-down approach. One downside to participative budgeting is that employees may try to build a little extra cushion, or budgetary slack, into their budgets. They can do so by understating expected sales or overstating budgeted expenses, making it more likely that they will look good by coming in under budget for expenses or over budget for revenues. Budgets can also create a use-it-or-lose-it mentality that encourages managers to spend their entire budget to avoid a reduction in resources the next budget period. Many of these dysfunctional behaviors can be minimized by implementing the following budget-setting guidelines: Use different budgets for planning than for performance evaluation. Although budgetary slack can make planning difficult, it provides a way for managers to hedge against uncertainty, or future events they may not be able to anticipate or control. Some budget slack can be beneficial, particularly in organizations that face major fluctuations in demand or costs that are beyond the manager's control. Use a continuous, or rolling, budget approach. Under continuous budgeting, the company maintains a rolling budget that always extends a certain period into the future. When one budget period passes, another is automatically added at the end. This approach keeps managers in continuous planning mode, always looking into the future, and helps avoid the budget games that are sometimes played at the end of a budget period. Use a zero-based budgeting approach. Under zero-based budgeting, the entire budget must be constructed from scratch each period rather than using last period's budget as the starting point. While time-consuming, it makes managers justify their budget each year and can help control unnecessary spending. SPOTLIGHT ON ETHICS Playing Budget Games Managers who are evaluated and rewarded for meeting budgetary goals may engage in game playing. For example, a sales manager who has reached his or her sales quota for the week may try to defer sales to a future period by telling customers to come back later to make their purchase. Managers may even be tempted to postdate orders so that they appear to have been made in a different time period. Alternatively, a salesperson who has not met his or her quota may cut prices at the end of the period to increase sales volume and meet the sales goal. By engaging in these tactics, managers are putting their own self-interest ahead of the organization's objectives. Although the complete elimination of such budget games is difficult to achieve, organizations must try to design their budgets and control systems to minimize these dysfunctional behaviors. As this discussion indicates, managers must take a variety of behavioral factors into account in designing and implementing a budget system. There is not a one-size-fits-all solution to budgeting. The best approach Page 355 depends on the nature of the business environment, type of organization, and tasks that managers must perform within the organization