Accounting Research Center, Booth School of Business, University of Chicago

The Budgetary and Performance Influences of Product Standardization and Manufacturing

Process Automation
Author(s): Peter Brownell and Kenneth A. Merchant
Source: Journal of Accounting Research, Vol. 28, No. 2 (Autumn, 1990), pp. 388-397
Published by: Wiley on behalf of Accounting Research Center, Booth School of Business,
University of Chicago
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Journal of Accounting Research
Vol. 28 No. 2 Autumn 1990
Printed in U.S.A.

Capsules and Comments

The Budgetary and Performance

Influences of Product
Standardization and
Manufacturing Process Automation
PETER BROWNELL* AND KENNETH A. MERCHANTt

1. Introduction
This study examines how product standardization and manufacturing
process automation influence the relations among budgetaryparticipation,
flexibility of budget targets, and departmental performance. Product stand-
ardization (the product dimension) varies from "one-of-a-kind' (low) to
"commodities" (high); manufacturing process automation (the process
dimension) varies from "job-shop" settings (involving reliance on hand
tools) to "continuous flow" production settings (featuring robots and
computer-assisted design and manufacturing aids, such as CAD/CAM).
These definitions are developed from Hayes, Wheelright, and Clark
[1988] and Clark and Hayes [1988].

* University of Melbourne; t University of Southern California. The authors thank

participants in workshops at Macquarie University and the University of Queensland for
comments on earlier drafts of this paper. Particular thanks are due to the referee whose
comments have significantly improved this paper. Thanks are also due to Rajiv Banker,
Stan Baiman, Bob Kaplan, Peter Easton, Alan Dunk, Graeme Harrison, and Les Johnson
for comments and suggestions. The research was supported in part by the Australian
Research Council and the Division of Research, Harvard Business School.
388
Copyright ?), Institute of Professional Accounting 1990

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 BUDGETARY AND PERFORMANCE INFLUENCES 389
We examine the influence of product and process on the relation
between budgetary participation and departmental performance and on
the link between flexible budgeting and departmental performance. Our
results suggest that the product dimension significantly affects the rela-
tions among each of the two budgeting variables and performance, while
the process dimension does not.

2. Theory
2.1 TECHNOLOGY AND BUDGETARY PARTICIPATION
As suggested by Brownell and Hirst [1986], budgetary participation
can extend to matters relating to task technology; we explore this aspect
of participation in this study. The optimal input/output relation for
highly standardized products is either known or can be learned through
experience, as opposed to being a matter for negotiation between budg-
eted managers and their superiors. The scope for "local expertise" is
clearly limited in this setting. By contrast, low standardization implies
little experience and difficulty in unambiguously specifying the proper
set and order of input. Participation provides a means of pooling the
experience and knowledge of budgeted managers and their superiors and
offers the potential to assist in resolving these uncertainties. We con-
clude, therefore, that product standardization is likely to influence the
relation between participation and performance, this relation being more
positive when the product is less standardized.
The role of budgetary participation is less clear when we consider the
process automation dimension of manufacturing technology. On the one
hand, Hayes et al. [1988, p. 274] suggest that process development, with
increased automation as one form, increases control over manufacturing
processes. This increased control is achieved through the direct incor-
poration of control mechanisms into the manufacturing technology itself,
for example, automated measuring systems for quality control. Auto-
mated controls could, therefore, reduce the role for budgetary controls
and, hence, for managerial participation in setting budgets. In addition,
Berliner and Brimson [1988] suggest that in automated manufacturing
facilities, manufacturing measurements are likely to supplant financial
measurements as a basis for cost allocation. Such manufacturing meas-
urements are likely to be automated and built into the technology itself.
Participation in such settings is unlikely to contribute to enhanced
departmental performance.
On the other hand, automated manufacturing facilities, especially
systems emphasizing flexibility, provide the manufacturing manager with
choices in such matters as work scheduling. To the extent that these
choices have cost implications, the manufacturing manager has more
scope for meaningful participation in setting manufacturing budgets than
in the case of a traditional technology which precludes choices on matters

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390 JOURNAL OF ACCOUNTING RESEARCH, AUTUMN 1990

like work scheduling. We conclude that the effects of process automation

on the relation between participation and departmental performance are
unclear.

2.2 TECHNOLOGY AND FLEXIBLE BUDGETING

Prior research (e.g., Hopwood [1972], Otley [1978], Hirst [1981; 1983],
Brownell [1982; 1985], Govindarajan [1984], and Govindarajan and
Gupta [1985]) has examined circumstances which call for variations in
the type and style of use of accounting information in management
control. Here we consider the potential of the product and process
dimensions of technology to influence the effect on performance of one
style of use of accounting numbers-namely, the extent to which budgets
are treated as static versus flexible.
One assumption of flexible budgeting is that cost/volume relations are
understood well enough to permit sensible, volume-based budget adjust-
ments. Otherwise such adjustments will be imprecise, at best, and sub-
sequent performance evaluation with such adjusted budgets will be prob-
lematic. Understanding cost/volume relations depends first on identify-
ing the relation between a unit of productive capacity input (e.g., a
machine hour) and a unit of output and, second, on costing a unit of
productive capacity. Product standardization is likely to contribute to
the first and process automation to the second.
If we consider product standardization first, when all units of output
are different (low standardization), knowledge of input/output relations
is poor because little learning or experience with a given product would
accrue. By contrast, when all units of output are identical (high stand-
ardization) considerable knowledge would accumulate, so flexible budg-
eting would be more appropriate.
Regarding process automation, in a fully automated production facility,
particularly one featuring robotics, the cost of a unit of productive
capacity (e.g., a machine hour) is easily estimated; indeed, it may be
engineered into the facility's design. By contrast, multiple sources of
error exist in cost estimation involving largely labor-based production
facilities. Process automation therefore contributes to meeting the second
requirement for the successful application of flexible budgeting. This
suggests a stronger positive relation between flexible budgeting and
departmental performance where process automation is high than where
it is low. Static budgeting should be confined to situations where process
automation is low.
We evaluate these arguments by estimating both the relation between
use of budgets as static targets and departmental performance for high
and low product standardization, and the relation between use of budgets
as static targets and departmental performance for high and low process
automation.

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 BUDGETARY AND PERFORMANCE INFLUENCES 391
3. The Empirical Study
3.1 SAMPLE
Nineteen electronics firms participated in a survey questionnaire study;
within firms, the unit of analysis was the production department man-
ager. We chose this industry because of the variation in manufacturing
technologies and product characteristics across organizations and across
departments within an organization. The products manufactured by
sample corporations include integrated circuits and semiconductors, elec-
trical cables, telecommunications equipment, computing equipment, and
medical instruments and equipment. We interviewed a senior corporate
official in each firm to solicit approval of the study and to identify a
sample of production department managers; managers so identified var-
ied in number from 3 to 21 across the 19 corporations. However, the
procedures were not sufficient to ensure that sampling was random.
Questionnaires were mailed to 201 individual production managers by
the researchers. Each questionnaire was covered by a memorandum from
the senior corporate official encouraging involvement in the study. We
obtained 146 (73%) usable, mail-returned questionnaires.

3.2 MEASURES
We measured five variables in the questionnaire: departmental per-
formance, budget participation, use of budgets as static targets, process
automation, and product standardization. A summary of the measures is
given in Appendix A.
The first variable was a self-rating of departmental performance meas-
ured on a five-point scale anchored at the extremes with one (well below
average) and five (well above average). Self-ratings add to the assurances
given for anonymity, and, although it is often claimed that self-ratings
are subject to a "leniency" bias, evidence inconsistent with this view also
exists (Heneman [1974] and Venkatraman and Ramanujam [1987]). We
did not seek formal corporate records of departmental performance
because such records would be unlikely to provide a consistent measure
across the 19 corporations.
To measure budget participation, we used a modified version of Swier-
inga and Moncur's [1975] instrument, which involves 42 items that
describe the design and operation of budgeting systems. Respondents
were asked to indicate on a scale ranging from one (never) to five (always)
the frequency of each activity in their own departments. Factor analysis
of their responses (Nie et al. [1975]) produced six factors with eigenvalues
greater than unity, collectively accounting for 81.4% of the total variance.
After oblique rotation, the six factors were identified with specific ques-
tionnaire items, using a factor-loading criterion of 0.40. One of the six
factors, accounting for 13.4% of the overall variance, was represented by

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392 P. BROWNELL AND K. A. MERCHANT

two items: (1) "the budget is finalized only when I am satisfied with it,"
and (2) "new budgets include changes I have suggested." We summed the
scores for the two items loading on the factor to measure participation.
A single item, not part of the Swieringa and Moncur [1975] study and
not included in the factor analysis described above, measured use of
budgets as static targets. The item ("My superior is disturbed when my
department exceeds its original budgeted expense level, even when the
volume of activity is also higher") was scored from one (always) to five
(never). Scoring was reversed for analysis so that low scores imply flexible
budgeting.
The operational measure of process automation is the three-part
instrument developed by Inkson, Pugh, and Hickson [1970]. The first
part calls for a rating of the degree of automation of the most automatic
piece of production equipment used in the respondent's department. The
rating is on a six-point, fully anchored scale given in Appendix A. Using
the same scale and anchor set, the second part elicits a rating of the
degree of automation of the bulk of the production equipment in use in
the respondent's department. The third part provides a rating of the
degree of automation of finished product quality control on a three-point,
fully anchored scale given in Appendix A. The responses were summed
to give the overall measure of process automation. The summation is
based on the results of Hickson, Pugh, and Pheysey [1969], who showed
that all three parts are highly correlated and load together factor analyt-
ically.
We used a single-item measure, administered on a four-point, fully
anchored scale, to measure product standardization. The four anchors
are given in Appendix A, and respondents were asked to circle one
category. This measure was based on the interview data gathered at the
study's onset. In the analysis which follows, product standardization was
dichotomized because only 4 respondents used the first category and 18
the last. Low standardization was coded -1 and high standardization +1.

4. Estimation Procedures and Results

Four regression equations of the following form were fitted to the data:'

Yi= So0+ 11X1, + 32X2i + f3X1iX2i, i = 1, ... , 146 (1)

where Y, is the departmental performance rating of production depart-

ment head i, X1i is respondent i's score for budget participation or use of
budgets as static targets, and X2j is respondent i's score for product
standardization or process automation.

1 Plots of residuals from all regressions against their normal scores provided no evidence
of nonnormality.

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 BUDGETARY AND PERFORMANCE INFLUENCES 393
4.1 RESULTS
The results are contained in table 1. To conclude that the effects of
the budget system variables (X1 in equation (1)) on performance depend
on the technology variables (X2 in equation (1)) requires that the coef-
ficient (03) for the X1X2 term is significantly different from zero. Panel
A of table 1 reports that O3is significant in a regression fitted to examine
whether the effect of participation on performance depends on product
standardization.
To explore the relation between performance and budget participation
(BP), we estimated two functions, one for low and one for high product
standardization (PS). For low PS:
Y= (10 -102) + (01 - 03)BP, (2)
and for high PS:
Y= (i0 + 02) + (W1 + 03) BP. (3)

TABLE 1
Coefficients (t-Statistics) from Cross-Sectional Regressions of Departmental Performance on
Budgetary, Product Standardization, and Process Automation Measures
Panel A Panel B
Y, = /3o + 013BPj+ 32PSi + 03BPjPSj Yj = A0+ J1BPj + 02PAi + 03BPjPAi
Oo 3.49 (11.87**) O% 3.75 (4.36**)
11 0.05 (1.27) 31 0.01 (0.11)
02 0.45 (1.54) 12 -0.05 (-0.51)
13 -0.09 (-2.24*) 03 0.01 (0.63)
R2 = 0.10, F3,142 = 5.51** R2 = 0.04, F3,142 = 1.87

Panel C Panel D
Y= i0 + 01BST, + 32PSi + 03BSTPSi = A0+ 01BSTi + 02PAi + 03BSTiPAi

Oo 4.15
(19.91**) /3 4.38
(8.06**)
11 -0.10
(-1.37) 11 -0.25
(-1.28)
12 0.22
(1.07) 12 -0.04
(-0.75)
03 -0.16
(-2.16*) 03 0.03
(1.21)
R2 = 0.08, F3,142= 3.85** R2 = 0.02, F3,142= 0.81
Notation:
i indexes a department; i = 1, ***,146.

Y, is departmental performance rating of manufacturing department head i. Score is on a scale from 1

(low) to 5 (high).

BPj is budget participation score for department head i. Score is on a scale from 2 (low) to 10 (high).

PS, is a binary variable for product standardization score for department head i. Score = -1 if respondent
scores 1 or 2 (low PS) on a 4-point scale, or +1 if respondent scores 3 or 4 (high) on the scale.

PA, is process automation score for department head i. Score is on a scale from 3 (low) to 15 (high).

BSTj is use of budgets as static targets for department head i. Score is on a scale from 1 (flexible
budgeting) to 5 (static budgeting).
p < 0.05.
** p < 0.01.

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394 P. BROWNELL AND K. A. MERCHANT

Inserting in equation (2) the coefficient estimates shown in panel A of

table 1 gives a coefficient of 0.15 for BP, and in equation (3), -0.04.
Notice that performance is a significantly more positive function of BP
where PS is low than where PS is high.2 The significance of the difference
between the slope coefficients is given by the t-statistic for f3 in panel A
of table 1 (p < 0.05).
When equation (1) was fitted with process automation (PA) substi-
tuted for product standardization, 03 is not significant at the 0.10 level.
Panel B of table 1 gives the results. We conclude that process automation
has no significant moderating effect on the budget participation-perform-
ance relation.
Panels C and D of table 1 show the results of substituting use of budget
as a static target (BST) for budget participation. From panel C it is seen
that 3 is significant (p < 0.05). Decomposition of the regression equation
into separate functions for low and high product standardization gives
coefficients for BST of 0.06 and -0.26, respectively. As predicted, these
results show that the effect on performance of using budgets as static
targets is significantly more positive when product standardization is
low.3 Again, the degree of significance is given by the t-statistic for f3 in
panel C of table 1 (p < 0.05).
The results in panel D of table 1 show that process automation has no
moderating effect on the relation between the use of budgets as static
targets and performance; 03 is not significant at the 0.10 level, nor is the
entire regression.

5. Discussion, Limitations, and Conclusions

The results of the study indicate that product standardization influ-
ences the performance effects of two aspects of budget system design and
use. Where product standardization is low, high participation and use of
budgets as static targets are each found to be significantly more effective
in promoting departmental performance than where product standardi-
zation is high.
On the other hand, our results suggest that the process dimension, as
defined in the study, is either unimportant or poorly measured with our
instrument. Each is a possibility. First, other process dimensions, such
as work-scheduling methods, design engineering methods, "just-in-time"
inventory control methods, and the degree of flexibility of the manufac-
turing process (McNair and Mosconi [1989], Hall [1987], and Suzaki
[1987]), could influence optimal budget system design. None of these is
captured by our instrument. Second, the instrument was developed in
1970, so it may not adequately capture some aspects of a contemporary
2
The Spearman correlation between performance and participation is 0.33 (p < 0.01)
when product standardization is low; for high product standardization it is -0.08 (n.s.).
3The Spearman correlation between static budgeting and performance under low product
standardization is 0.06 (n.s.), and under high product standardization it is -0.25 (p < 0.05).

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 BUDGETARY AND PERFORMANCE INFLUENCES 395
notion of automation, although this possible deficiency is not obvious
from an inspection of the measure.
Several other potential limitations deserve mention. First, self-ratings
of performance, whether focused on the individual manager or, as in this
study, on that manager's department, have been criticized on the grounds
of objectivity, although alternative, more objective measures are not
obvious. Second, we used a single item to measure the use of budgets as
static versus flexible targets. Although no obvious concern is apparent
with the item used here, further work is suggested to develop a multi-
item instrument which would therefore permit a reliability assessment.
Finally, the cross-sectional performance differences found in this study
could also be due to incentives. For example, highly participating man-
agers could confront incentive systems which differ systematically from
those facing managers whose participation is low. Perhaps participation
permits a narrow focus on budget achievement to assess performance.
Such incentive system differences might account for performance differ-
ences otherwise attributable to budgetary participation. Similarly, incen-
tive schemes might differ with product standardization. The level of
output of highly standardized products may be a better proxy for mana-
gerial effort than if the product is not standardized. However, confound-
ing our results on the interaction between budget participation and
product standardization requires incentive schemes which have re-
sponded to specific combinations of participation and standardization.
That is, it requires incentive schemes which differ for highly participating
managers across low and high product standardization, and differ again
for low-participating managers across the two levels of standardization.

APPENDIX A

Operational Measures of Variables

1. Performance
Single, five-point, fully anchored item (ranging from well below to
well above average):
How effective do you perceive your department to be relative to other
comparable departments?

2. Budgetary Participation
Summation of scores on two five-point items (agree/disagree):
( i) The budget is finalized only when I am satisfied with it.
(ii) New budgets include changes I have made.

3. Static Budgeting*
Single, five-point item (always/never):
My superior is disturbed when my department exceeds its original

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396 P. BROWNELL AND K. A. MERCHANT

budgeted expense level, even when the volume of activity is also

higher.
* Scoring reversed in analysis; low scores imply flexible budgeting,
high scores static budgeting.

4. Process Automation
Summation of scores on three items:
(i) Which of the following categories best describes the most auto-
matic piece of equipment used in your department?
-hand tools and manual machines
-powered machines and tools
-single-cycle automatics and self-feeding machines
-automatics that repeat cycles
-self-measuring and adjusting by feedback
-computer controlled.
(ii) Which of the following categories best describes the bulk of the
production equipment used in your department? (Same six an-
chors as in (i).)
(iii) Which of the following best describes how finished products are
evaluated?
-personal evaluation only. No measuring instruments are used.
-partial measurement. Some aspects of output are measured.
-full measurement. Measurements are used over virtually the
whole of output to compare against precise specification.

5. Product Standardization
Single, four-point, fully anchored item:
How would you characterize the production of your department
on the following standardization scale?
-each unit custom-made.
-products differ but have common components.
-products basically alike, with only minor differences; e.g.,
models, add-on features
-products completely standardized.
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