International Journal of Business and Management; Vol. 8, No. 20; 2013
ISSN 1833-3850
E-ISSN 1833-8119
Published by Canadian Center of Science and Education
Integration of Ethical Values into Activity-Based Budgeting
Pierluigi Santosuosso1
1
School of Economics, Sapienza University of Rome, Italy
Correspondence: Pierluigi Santosuosso, School of Economics, Sapienza University of Rome, Rome, Italy. Tel:
39-6-4976-6460. E-mail: pierluigi.santosuosso@uniroma1.it
Received: July 29, 2013
Accepted: August 23, 2013
Online Published: September 22, 2013
doi:10.5539/ijbm.v8n20p1
URL: http://dx.doi.org/10.5539/ijbm.v8n20p1
Abstract
Despite appeals from public opinion all over the world for the development of ethics in business and the
widespread adoption of a Code of ethics by many firms, the integration of ethical values into the corporate
planning process has received little attention either in real life or in research literature. In order to overcome the
gap between ethical principles and practice, this study underlines some key points which could help the
integration of values into Activity-Based Budgeting: identifying ethical values, creating an Ethical framework,
examining the distinctive parts of actions, choosing a preference order for values, incorporating the values into
each single element of every activity. The approach based on activities allows managers to give visibility to
those objectives with an ethical dimension and incorporates them analytically into the budgeting system.
Keywords: ethical values, ethical decision making, activity based budgeting, planning process
1. Introduction
The subject of business ethics has received a great deal of interest from public opinion, consumers, politicians,
managers and economists all over the world. The word “ethics” is now widely used in conferences and
newspaper articles and there is a growing literature on business ethics (Brenkert, 2010), whilst the adoption of a
Code of ethics by an increasing number of firms around the world (Kaptein, 2004; Schwartz, 2005; KPMG
Forensic, 2008; Singh et al. 2011) confirms the importance of this issue for managers and entrepreneurs.
However, does a Code encourage the achievement of corporate objectives with an ethical dimension? Are
managers and employees running their firms more ethically? The question of the effectiveness of a Code of
ethics has been addressed in several studies. Literature reviews on this issue have been made by Schwartz (2001,
2004), Lere & Gaumnitz (2003, 2007), B. Stevens (2008), Kaptein & Schwartz (2008), Ho (2010), Singh (2011)
and Kaptein (2011), to name just a few. The research literature, however, provides conflicting results; it is not
clear what effect a Code of ethics has on decision making and what factors influence the effectiveness of a Code
(Helin & Sandström, 2007; Kaptein & Schwartz, 2008; Singh, 2011). The issue is not purely academic, without
any practical consequences. As ethical values, or simply values, govern managers’ and employees’ behaviors,
ethical matters have economic, social and legal effects on the firms’ performance and on society as a whole.
Despite the appeals for ethics in business and analyses of the factors that are likely to reinforce the effectiveness
of ethical codes, malpractice does not appear to be abating (Webley & Werner, 2008; Brenkert, 2010). A high
percentage of employees in U.S. companies testify to misdeeds within their firms (KPMG Forensic, 2008; Ethics
Resource Center, 2012). Even today we are witnessing varied and numerous episodes of misconduct, such as the
violation of workplace health and safety rules, the infringement of environmental standards, the mismanagement
and misuse of an organization’s resources and company time, false or deceptive sales practices and lying to
employees (KPMG Forensic, 2008; Ethics Resource Center, 2012). Ethical compliance programs, such as ethical
codes, policy statements, speeches, systems for reporting malpractice, do not seem to reduce legal violations
(McKendall, DeMarr & Jones-Rikkers, 2002).
This has led researchers, businessmen and politicians to analyze the issue in the hope of finding better solutions.
The purpose of this work is to make values more visible and tangible in order to make them an integral part of
the corporate planning process and therefore overcome the gap between ethical principles and practice. “The
things included in the measurement become relevant; the things omitted are out of sight and out of mind”
(Drucker, 1954). The integration of values into the planning process, however, is not an easy task. On the one
hand, managers have to identify values for their firms which will satisfy the requirements of moral judgment; on
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the other hand, effective budgeting needs an approach that allows the inclusion of objectives with an ethical
dimension into a concrete plan of action. This paper will propose that an effective way of integrating values into
budgeting through Activity-Based Budgeting. It proposes that planning should focus on activities in which
activities are identified and organized into broader processes to support strategic goals.
The article is organized as follows: the second section provides a brief review of the literature; the third section
describes the identification process of corporate ethical values; the fourth section explains the need for
establishing a preference order for ethical values; the fifth section presents their integration into Activity-Based
Budgeting; the sixth section describes a case study; the last section summarizes the steps of the integration
process and presents some concluding remarks.
2. Literature Review
The decision-making process is an old issue, as old as the origin of ethics (the words moral and ethical are used
here as synonymous, the difference simply being due to their etymology). Philosophers, economists and
politicians have debated about human behavior for centuries. Over the course of history, many moral doctrines
have been developed, including utilitarianism, eudaemonism, emotivism, historicism, ethical relativism,
deontological duty-based approach and virtue ethics (Shaw, 2005; Velasquez, 2006; Weiss, 2006). Moral
doctrines have not only explored theoretically the concept of good and bad, but have also examined in detail the
decision-making process. According to the studies of Thomas Aquinas in the 13th century (Summa Theologica,
Prima Secundae), the decision-making process can be broken down into elementary stages, driven by the
intellect and the will (De Finance, 1997). Firstly, the idea of an ethical value is formed and the will accepts it
(voluntas); an opinion is formed about the possibility of putting into practice the ethical value (intentio); an
analysis for an appropriate solution for the purpose is made (consilium); certain solutions are accepted
(consensum); the decision about the best solution is chosen (electio); the order to implement the chosen solution
is given (imperium); the chosen solution is executed (usus); the material good is used (fruitio).
More recently, the problem of ethical decision-making has been addressed by many researchers. Much of the
research, developed on the basis of psychological theories (Kohlberg, 1969), suggests theoretical models
containing different phases (Rest, 1986; Trevino, 1986; Ferrell & Gresham, 1985; Hunt & Vitell, 1986; Bommer
et al., 1987; Dubinsky & Loken, 1989; Stead, Worrell & Stead, 1990; Jones, 1991). In one of the most famous
and frequently cited models, ethical decision-making is composed of four stages: recognizing an ethical issue,
making moral judgments, establishing moral intentions and engaging in moral behavior (Rest, 1986). The stages
in the models are usually supplemented by various individual characteristics and organizational forces that
influence decision-making, as for example, ego strength, field dependence and locus of control, immediate job
context, organizational culture and characteristics of the work itself (Trevino, 1986), social, government and
legal environments, professional and personal environments, individual qualities (Bommer et al., 1987). Other
models, based primarily on experience gained in professional practice, propose a variety of steps to identify and
resolve ethical dilemmas. Following the identification of the ethical dilemma and the gathering of information
essential for decision-making, these models emphasize the analysis of alternative actions and their consequences
(Rocco Cottone & Claus, 2000). These models are based mainly on the Deontological approach (when actions
are judged morally right depending on how well they conform to a particular set of principles) or on the
Consequentalist approach (when actions are judged morally right in relation to their consequences).
In addition to the models proposed by academics and practitioners, the ethical decision-making process has been
investigated in large numbers of surveys which aim to verify empirically a wide range of factors that affect the
process, such as the philosophical conception of morality, cognitive moral development, gender, education and
work experience, age, nationality, the cultural and ethical climate, the rewards and sanctions system, religion,
moral intensity, the kind of Code of ethics, industry type, organizational size etc. (Ford & Richardson, 1994;
Loe, Ferrell & Mansfield, 2000; O’Fallon & Butterfield, 2005). The surveys are based on an analysis of the
ethical “perception” of managers, employees and students faced with hypothetical ethical dilemmas. The
findings are mixed, inconclusive and are open to criticism about the identification of a representative sample, the
reliability or validity of measures, the methodological procedures for understanding an individual’s moral
reasoning (Randall & Gibson, 1990; Weber & McGivern, 2010) and, more generally, about the impossibility of
applying ethical theory to real life (Barlett, 2003). Without going into a detailed analysis of the research
literature, it is nevertheless worth noting that the main limitation of much of the empirical research lies indeed in
the concept of ethical “perception”. The “perception” of a hypothetical dilemma expresses a mere opinion of the
people interviewed about some ethical issues; action is instead the expression of a moral judgment in the strict
sense. We will summarize the concept of moral judgment in section three.
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Ethical decision making is only part of the integration of values into the planning process. It is principally
concerned with specific decisions taken by individuals, whilst real integration of ethical values drives the
organization as a whole towards multiple objectives with an ethical dimension.
In order to overcome the gap between ethical principles and practice within firms, two main approaches have
been suggested, firstly, the creation of an ethical corporate culture and secondly, the introduction of an effective
ethics policy (Webley & Werner, 2008). As far as the creation of an ethical culture or climate in concerned, there
are several mechanisms that allow managers to shape a values-based organization. These include the charismatic
role of top managers, leadership styles, the development of ethics programs by communicating and monitoring
ethical values, good organizational practice (Ferrell, Fraederic & Ferrell, 2011), the discussion of moral issues as
part of the manager’s job (Water & Bird, 1987), setting up clear standards of ethical behavior, recognition and
rewarding of behaviors that sustain organizational values, feedback, awareness of individual differences,
(Grojean et al., 2004), the behavior of top management as an example for the rest of the organization (Adam &
Rachman-Moore, 2004), ethics code awareness (Valentine & Barnett, 2003), ethics training (Valentine, 2009),
an ethical climate of benevolence (Cullen et al., 2003). Although ethical culture and ethical climate play an
important role in ethical decision-making (Trevino, Butterfield & McCabe, 1998), empirical studies have not yet
provided conclusive results (Loe, Ferrell, & Mansfield, 2000; O’Fallon & Butterfield, 2005; Helin & Sandström,
2007; Kaptein & Schwartz, 2008).
As regards the need for an effective ethics policy, less attention in the research literature has been given to
approaches that actually incorporate values into corporate planning (Helin & Sandström, 2007) than to studies on
the development of an ethical climate and culture. Robin and Reindenbach (1987) suggested the integration of
ethical and socially responsible plans into strategic marketing planning based on a model consisting of four stages
in which each stage is divided into two parallel processes: the identification of ethical values and the development
of a marketing strategy. Guerrette (1988) set out a five-step development plan of management strategies in which
emphasis was placed on the need for continuing professional training and the reformulation of corporate strategy
in accordance with a Code of ethics and the corporate value statement. Hosmer (1994) recommended that ethics
must be part of the planning process in order to enhance trust, commitment and effort among stakeholders.
Rampersad (2003) provided a strategic management model in which the personal goals of people were integrated
into the organizational Balanced Scorecard aligning the personal ambition of managers and employees with the
shared organizational mission. Bonn and Fisher (2005) underlined the importance of a flexible approach towards
the development of guidelines for ethical conduct as well as structures and processes for monitoring and
improving ethical behavior. Ferrell, Fraedich and Ferrell (2011) suggested that ethical compliance can be ensured
by organizing activities to reach corporate objectives.
3. Identification of Corporate Ethical Values
Many moral doctrines have investigated the concept of good and bad in the course of time. Rather than provide
an overview of the philosophical thought, this paper will outline some key arguments related to ethical
decision-making. Regardless of the philosophical conception of morality, individuals are moral entities that
decide and act on the basis of their moral judgment. As shown in several ethical decision making models (Rest
1986; Trevino 1986; Hunt & Vitell, 1986; Dubinsky & Loken, 1989; Jones, 1991) and in valuable studies on
Ethics (De finance, 1997; Pinckaers, 1992), moral judgment is the linchpin of decision-making and has a key
role in the workplace for managerial work (Loviscky, Trevino & Jacobs, 2007; Street, 2001).
The choice of what constitutes “good and bad” is not left to the whim of managers and employees, but is the
result of moral judgment in the strict sense of the word. Values originate from an examination of our behavior
and/or the behavior of other people who are directly or indirectly involved in the business (employees,
consumers, investors, suppliers and other stakeholders). In a person with a developed sense of moral reasoning,
we can observe a reaction of approval for behavior deemed moral or a response of disapproval for behavior
deemed immoral: admiration or disapproval of the behavior of others, gratification or remorse for our behavior.
These experiences are known as moral experiences (De Finance, 1997) and on the basis of these experiences, a
person begins to formulate moral judgments about what is good and what is evil. Through the awareness of
values, people acknowledge the incompleteness of their own existence and the need to put them into practice.
Values appear as good that needs to be done; a “duty to be” which demands a “must do”. People are often heard
saying “I have to help that person” or “I ought to behave in this way”. Moral judgment guides an individual’s
own actions and suggests behaviours that should be adopted by others (Leavit et al., 2012). More specifically,
moral duty persuades people to do good. Actions that are needed for its achievement reinforce positive
experiences of admiration or gratification and free them from the experience of remorse or moral scandal.
Judgment of the “right reason” (De Finance, 1997) shows what good, or human values, deserve to be pursued.
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Moral duty plays a key role in the ethical decision process (Haines, Street & Haines, 2008) although it has
received minimal emphasis in the research literature. And, fundamental to the decision-making process is the
presence of freedom, which is also rarely discussed in business theory (Dierksmeier, 2011). Free will is a basic
concept addressed by philosophers in the course of many centuries (Kane, 1998; O’Connor, 2012). Although the
concept could have different meanings, freedom is essentially considered here as freedom of acting without
constraints (Pinckaers, 1992). Acting with free will, is the main requisite for moral reasoning in ethical
decision-making. In the absence of freedom, moral duty cannot exist and any action that follows is devoid of
any willingness to act (Drascek & Maticic, 2008).
The identification of the values according to the ethical decision process mentioned above can lead to the editing
of an “Ethical framework”. The Ethical framework lists a series of values that deserve to be affirmed. For a
better analysis and updating of the Ethical framework, managers can classify values in order to highlight some
major features. This paper suggests at least two general criteria for this classification. The criteria enable us to
understand and detect the objective and subjective aspects of ethical values.
The first criterion is based on the objective nature of ethical values, which range from the physical to the
spiritual nature of mankind. Biological values are related to the basic needs of every human being (e.g. food and
health) and sensitivity values are represented by the pain and pleasure that comes from the senses (e.g. fatigue or
rest, fear or serenity). Economic values are directly related to the use of human faculties to obtain economic
goods (e.g. wealth creation, values related to the acquisition of professional skills, development of the
personality through the use of power and success), whereas social values emerge when we consider the
individual in the community where he or she lives (e.g. the ability to maintain relationships, the aptitude to lead
an organization or settle disputes). Other values include aesthetic values related to the attractiveness of
something a person has created (e.g., the beauty of a product, the pleasantness of the place of work), knowledge
which concerns the knowledge of truth or falsehood (e.g. the values of experience, education, competence,
accuracy of information) and the values concerning the will and the natural ability of people to achieve their
own ends (e.g. temperament, perseverance, courage). Moral values in a strict sense are concerned with making a
moral judgment and behaving in an honest way consistent with this judgment (dependent on the freedom of
choice). Finally, one cannot ignore religious values (e.g. an organization that does not discriminate employees,
suppliers or customers for their religion).
The second classification criterion is made according to the type of stakeholders, such as employees, suppliers,
customers, investors, the community and all other persons not yet affected by corporate policy. Although an
Ethical framework can also specify the names of employees, customers or suppliers involved in the business
activity, this classification is not made in order to find solutions that satisfy the specific interests of these
individuals, but to identify the values of people involved in the activity of the firm. Between what people want
and values there is obviously a significant difference: not all stakeholders’ requests correspond to the values and
vice-versa not all values have been requested by stakeholders.
An Ethical framework differs from a corporate Code of ethics and from other principles and guidelines adopted
by Intergovernmental organization (Human Rights Council, 2011) in at least two ways. First, the Code of ethics
contains a wide range of general standards that apply to firms of any kind, as several empirical studies reveal
(Cressey & Moore, 1983; Carasco & Singh, 2003; Kaptein, 2004; Singh et al., 2011). Although the Ethical
framework may include a broad spectrum of general values, it sets out in detail some values and all specific
circumstances relating to persons, causes, effects, mode and places that are relevant to describe them.
Consequently, the number and the range of values can differ significantly according to the various characteristics
of the firms. Second, the Ethical framework is subject to being updated when a moral judgment suggests changes
and additions. A change in a moral judgment may arise from an analysis of the output of budgeting and/or from the
knowledge of other events and behaviors according to the cognitive process described in the second section.
These main characteristics show that the Ethical framework, as a dynamic and not static document, represents
the first step in effective corporate planning with an ethical dimension. This allows managers to begin to close
the gap between ethical principles and planning for the specific firm.
4. Preference Order and Consistency among Ethical Values
It is unlikely that all the values shown in the Ethical framework can be achieved to the same degree. There are a
number of reasons why all the values cannot be achieved equally. A first set of constraints is related to the
quantity and quality of the factors of production the firm needs for achieving its goals, e.g. lack of funding, lack
of workers’ skills or difficulties in finding material goods of high quality. A second set of reasons is due to
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external factors beyond the control of the firm, e.g. a new competitor’s entry into the market, the fluctuation of
consumer demand, the introduction of new laws and regulations, riots or climatic events.
Decision making under constraints has been widely addressed in the economic literature, especially in the
operational research area. The description of ethical issues in decision-making models has recently received a
great deal of interest by in increasing number of studies (Ormerod & Ulrich, 2013; Mingers, 2011). Although
the operational research methods can help managers to maximize the performance of a system under constraints,
difficulties in fully realizing the ethical values could lead managers to give priority to some values over others.
Some values may be totally achievable, whilst others only partially, as regards the number of people involved or
to what extent the objectives are achieved. Some values may also be immediately realized, but postpone the
achievement of others. In other words, during the course of the planning process, managers have to choose a
preference order among ethical values. In the presence of constraints, the choice is obviously complex, but
necessary. It is difficult to distinguish between good and bad and it is even more difficult to identify which value
should be achieved before others. The “Theory of value” (Schroeder, 2012; Hart, 1971), also called axiology,
explores this complex issue through the investigation of the nature of human values.
Without addressing the philosophical issue, the key point that this paper wants to stress is the existence of a
preference order among values. More specifically, in spite of the attempts to deny any universal values by ethical
relativism (De Finance, 1997; Shaw, 2005; Weiss, 2006), it is evident that a moral judgment tends to establish a
preference order among values in the midst of an ethical dilemma. For example, should resources be used for “an
exhibition of art” (an aesthetic value) or should they be used to pay medical researchers to develop “scientific
knowledge” (the value of knowledge)? There seems no doubt about the existence of a hierarchy of values. It is
likely that many managers and entrepreneurs with a developed moral reasoning would choose to use the resources
to pay researchers for advances in scientific knowledge.
For the resolution of this complex issue, it is clear that the nature of the values involved in an ethical dilemma
(whether biological, economic, social, aesthetic and so on) is not sufficient to decide the priorities to be followed.
For example, if substantial investments can increase the already available scientific knowledge only slightly,
should the investment be postponed in order to affirm an aesthetic value? Clearly, the answer depends on many
other factors. The complexity of the decision-making process increases when we are faced with a real life ethical
dilemma where many values are involved and various effects occur.
The criterion by which managers may identify the preference order is set by moral judgment in the sense specified
in section three. The moral duty of people, whose freedom of choice is not impaired or limited, allows the
identification of values and determines the intention to act for their achievement. The solution to the ethical
dilemma involving the preference order requires a deep examination of the problem. More specifically, a fully
accomplished moral judgment needs a preliminary analysis of actions that are going to be implemented.
The analysis can be made by an examination of four distinctive parts of the action (Vendemiati, 2004). Firstly, we
consider its ontological aspect. This describes its objective nature, e.g. the purchase of a machine, the sale of a
product, the hiring or firing of employees. The second aspect that characterizes the act is the so-called finis operis
(the purpose of the action). An action can have different purposes, e.g. the purchase of a machine can be made to
produce weapons or to produce cars, the firing of an employee can be made to reduce fixed costs or to deliberately
harm the worker. The third aspect of the act to be considered is the effects that it may generate. There is obviously
a wide range of effects, as for example, the purchase of a machine can cause environmental damage or an
improvement in employees’ working conditions, whereas the advancement of an employee's position has a
positive impact on his or her life, but could have a negative effect on those of other workers. The fourth aspect of
the act is constituted by the so-called finis operantis (the motive of the act). According to St. Thomas’s
well-known classification (De Finance, 1997), the objective of an action could be the pursuit of pleasure (physical
or psychological), the affirmation of good as an end (e.g. the production and distribution of drugs to poor
countries, education for deserving students) or the search for good as a means to achieve other goals (e.g. making
profit can be pursued in order to enjoy the consumption of material goods, to gain the esteem of other people or to
invest in scientific research).
The analysis of the different parts of actions allows us to make a moral judgment in a complete way and avoid
three types of risks. The first concerns making the right choice about the preference order of values. A deep
analysis of the single parts of the actions is necessary because certain aspects of behaviors introduced in order to
achieve the values may have to be examined so that a correct moral judgment may be made. The second is related
to the likelihood that constraints may induce, voluntarily or involuntarily, managers to assert the Machiavellian
“the end justifies the means” principle, whereas all objectives should be consistent with the values shown in the
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Ethical framework. In other words, in order to achieve the values shown in the framework in a consistent manner,
the analysis should prevent an action from stopping the assertion of other values. Thirdly, we cannot ignore the
ethicality that should be respected in budgeting. The ethical characteristics of budgeting are not limited to its
content, but should also include the way it is prepared. In the research literature, the ethics of budgeting has been
analyzed mainly as regard budgetary participation and budgetary slacks (Hobson, Mellon & Stevens, 2011; Libby,
2001; Lau & Tan, 1996; Casey Douglas & Wier, 2000).
5. Integration of Values into Activity-Based Budgeting
“The real difficulty lies indeed not in determining what objectives we need, but in deciding how to set them”
(Drucker, 1956). Goals that are not included in the planning process are not visible and will not be achieved,
especially if their achievement requires the co-ordination of different actors and the use of resources.
In order to determine what will be done, by whom, how and when, the identification of values should
subsequently be followed by their integration into the planning process, or to be more precise, into the budgeting
process. The integration of objectives with an ethical dimension into budgeting is however a complex issue.
Budgeting, in its most traditional form, has recently become the subject of criticism and debate about its
numerous dysfunctional aspects put forward especially by management consultants (Ekholm & Wallin, 2000)
and outlined by describing practical business experiences (Wallander, 1999). It focuses on costs rather than on
value creation (Hope & Fraser, 2000), is frequently reduced to the role of financial forecasting based on last
year’s costs and then simply adjusted to account for revenue growth or decrease (Bunce, Fraser, & Woodcock,
1995). Furthermore, it is not linked to strategy, it encourages gaming and perverse behaviours (Jensen, 2003), is
time-consuming (Hope & Fraser, 2003), leads to sub-optimal performances, does not consider the workload of
the activities, there is a lack of commitment, it does not reflect changes in the firm’s organization, outputs are
not visible (Brimson & Antos, 1999) and it is expensive (Schmidt, 1992). On the other hand, even though these
limitations have been found as well as many other problems which have been widely examined in the research
literature (e.g. budgetary slacks, budgetary participation, the effect of information asymmetry within the
process), traditional budgeting still plays an essential role in the corporate planning system. Rather than
abandoning it, attempts have been made to improve traditional budgeting (Libby & Lindsay, 2010; Ekholm &
Wallin, 2000).
This paper suggests that an ethical dimension can be better integrated into planning by preparing the budget on
the basis of business activities. Activity-Based Budgeting is one of the most well-known approaches aiming to
overcome the limitations of traditional budgeting (Hansen, Otley & Van der Stede, 2003). It proposes that
planning should focus on activities in which activities are “simply the work that is performed in transforming
inputs into outputs” (Brimson & Antos, 1999). Activities are identified and organized into broader processes to
support strategic goals. This model incorporates the mechanisms that have been outlined for achieving the key
objectives of advanced budgeting (Bunce, Fraser, & Woodcock, 1995). Activity-Based Budgeting has several
advantages over traditional budgeting which have been highlighted in studies, including the identification of the
causes of imbalances, inefficiencies and bottlenecks, the detection of capacity issues, the perception and
communication of information by lower-level managers and employees (Hansen et al., 2003), a clear
relationship between budgets and strategies, the assessment of detailed expenses across organizations, ongoing
performance improvements (Schmidt, 1992). Moreover, activities are easily planned, activities can be assessed
for their contribution to the firm’s mission and also be divided into value and non-value activities (Marcino,
2000).
Rather than being a panacea for all firms, Activity-Based Budgeting could be a suitable approach for planning
activities with an ethical dimension. It enhances the sophistication of the operational planning system (Hansen,
2011) that is needed in budgeting for managers who aim to establish “how” to achieve “qualitative” objectives.
More specifically, in order to integrate values into the planning process, this paper proposes each activity in
budgeting be structured on the basis of a set of key elements as listed below:
1) The input of the activity (the event that starts work in that activity);
2) The resources that are needed in the activity (equipment, software etc);
3) The number and names of employees;
4) The tasks assigned to employees, reward systems, hours of work and the deadlines to be observed;
5) The type of organizational structure;
6) The information required by employees to do their job;
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7) The output (or outputs) of the activity.
These elements are all interrelated in order to produce the output(s). Furthermore, all the activities are organized
in a system so that the output of one activity is usually the input of other activities; resources, employees and
information needed for achieving the output can also be shared by a number of activities.
The key factor in the preparation of a budget with an ethical dimension is the analytical introduction of values
into the elements of the activities. To clarify this point, let’s consider the following examples. In order to favor
environmental protection, the purchasing activity can be designed to buy high-quality resources (element n.2),
such as raw materials, machinery and equipment, with a low pollution impact. To safeguard the health of
workers, the company may plan to reduce working hours (element n.4) in the manufacturing process. To ensure
equal conditions for employees, the turnover in the manufacturing activity can be organized (element n.5) to
give a fair distribution of the workload. To provide information on the impact of production on the environment,
it may be necessary to design a public relations activity with the specific output (element n.7) of providing
adequate information to the public. The elements of the activities should be set out formally in software for
managerial applications. The system is simulated in order to analyze the efficiency and effectiveness of the
overall activities, which will highlight the strengths and weaknesses of the overall system. The software
provides detailed operational and financial reports on each activity and on the system as a whole (including the
amount of resources used, the time for completing the cycles of processes, fixed and variable costs, sales
revenue, etc).
The analysis and the systematic planning of activities, in the way mentioned above, offer several advantages.
We underline at least three main benefits. 1) Values often cannot be expressed in quantitative terms. Ethical
goals are not easily incorporated into the budget in its traditional form, but they can be included in activities as
output if we adopt Activity-Based Budgeting. Some of these can be measured by quantitative indicators, whilst
others can be expressed in qualitative terms (e.g. selection for promotion based on merit, the disclosure of very
complete information, a fair distribution of resources). This gives visibility to the outputs and reinforces
managers’ commitment to their attainment. 2) Activity-Based Budgeting allows us to organize activities
accurately in order to obtain the output. As pointed out earlier, a clear definition of the activity’s elements helps
to put into practice the ethical values outlined in the ethical values framework so that the tasks that the
employees are responsible for, the type of organization, timing, resources and other elements of the activity are
visible and planned in a precise and coordinated way. 3) Activity-Based Budgeting is easily updated by
introducing new activities or changing the elements of the existing activities. The updating can be preceded by a
simulation process. Focusing the analysis on the operations to be performed and on the financial results that
follow, the simulation allows the firm to modify the activities’ elements and the system as a whole before
implementing the plan.
6. Case Study
The integration of Ethical values into Activity-Based Budgeting was examined by implementing the model in a
small family-owned company which provides building services in central Italy. Edilizia Moliri, a private limited
company, specializes in historic preservation and interior renovations. The founder, along with his family,
shows the highest dedication in running his firm in an ethical manner.
Table 1 shows, in a simplified version, the system of corporate activities implemented in this firm. “Business
planning” deals with the identification of the Ethical framework, the definition of a preference order and the
consistency among ethical values, the preparation of budget and the organization of overall activity. As
described in section five, the outputs of the other activities are the inputs of downstream activities; resources and
employees are also shared by a number of activities (e.g. staff working in the “Business planning” activity is
involved in the other activities described in table 1).
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Table 1. Edilizia moliri limited, business activities
Activities
Input
Resources
Personnel
Business
At least once
Technical
Mr. Moliri
Planning
a year
advise
Mr. Smith
Task &
Reward
Dividend
Organization
Information
Output
Team
Personal
Ethical
structure
experience,
Framework,
consultants
Budget
Market
Client
Ms. Brown
Mr. Jones
Client
Clients
Service
contact
Advertising
Mr. Smith
Full-time
Architectural
Client
Software,
Ms. Brown
Full-time
Design
agreement
consumables
Mr. Doe
Full-time
Mr.
Traineeships
-
research
agreement
Horizontal
Customer
Architectural
structure
needs
project
Johnson
Manufacturing
Architectural
Raw material,
Mr. Jones
Full-time
Vertical
Technical
Building
Process
project
equipment
Four
Piece work
structure
guides
renovation
Piece work
-
workers
Control
At least once
Travel
of Activities
a month
expenses
Ms. Haven
Analysis
results
of
High quality
service
Note: the table shows the main information on the business activities. Tasks’ description, working hours, wages and the cost of resources are
not shown in this table. With the exception of the founder, the names of employees have been changed.
The system was modeled with a simulation software tool (Rockwell Automation, 2006) that allows the user to
create a simulation model and run experiments. Each activity was organized in more detail than is briefly set out
in Table 1. For example, as regards the “Client Service”, it was specified the minimum time in which the work
could be done (5 days), the most likely period of time to perform the work (8 days) and the maximum duration
of the activity (15 days). Furthermore, the model incorporates other additional variables such as: the daily
workload (8 hours per day), the hourly wage (12 euro), advertising expenses (300 euro on average for each
contact with the client), the percentage of contracts that actually follow the estimates (66%), the proportion of
wages and resources while they are actually used in the activity and while they are not used because of idle time.
The other business activities, shown in the table 1, have been defined in detail in a similar way.
The integration of ethical values into budgeting was carried out by a detailed definition of these variables, here
called the elements of the activities. More specifically, the budget of the small firm here examined was prepared
for achieving various ethical objectives. To help young unemployed people, the firm offers traineeships in the
“Architectural Design” activity; in order to favor the environmental protection, the “Manufacturing process”
uses high quality materials whilst the adequate number of workers here employed permits to reduce fatigue, to
protect their health and to respect their dignity; employee participation in “Business planning” promotes
self-esteem and group cohesion. Furthermore, the “Control of activities” gives the opportunity to affirm other
important values: the clients satisfaction and the protection of economic value of their properties.
The cost of these measures and other important information were examined by running the simulation. The
software (Rockwell Automation, 2006) generates numerous technical and financial reports. Table 2 shows some
of the average results of the simulation on the basis of ten iterations. The software also provides reports on the
specific resources (workforce and material goods) showing the total cost, their actual use and downtime.
On the basis of Activity-Based Budgeting, administrators do not focus on costs and revenues, but on things to
do, how to achieve them and their timing to be met. This is an easy and effective way for developing a plan; the
administrator's choices are quickly implemented in the budget and are analyzed in detail using a software tool
that permits the identification of the causes of imbalances, bottlenecks and inefficiencies. The method is
especially suitable in the case of objectives not expressed in quantitative terms, as often happens with objectives
having an ethical dimension. For example, increasing job satisfaction is a goal that can be achieved through
various measures. The administrator can intervene on working hours, ways of participating in meetings, the
quality of equipment and raw materials and on other elements of the activities. Based on the simulation results,
the administrator verifies if these elements could be achieved and if necessary intervenes again in order to obtain
the desired effect. Unlike the traditional planning, these aspects are formally incorporated into budgeting.
Although many companies are used to define their business activities to be carried out, the objectives not
expressly stated in the budgeting, and generally in the measuring processes, become irrelevant as time goes by.
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Table 2. Edilizia Moliri limited, simulation report
Activities
Business Planning
Client
Input
Output
Time per
Total time per
Total wait
Total cost per
(No.)
(No.)
entity (h)
entity (h)
time (h)
entity (€)
Total cost
(€)
3.1
2.4
158
357
467
6104
13802
13.7
13.3
76
1004
1221
1207
16044
8.3
7.1
159
1120
705
4717
33190
7.1
6.1
199
1198
515
25956
157052
6.1
5.6
82
467
0
1331
7568
Service
Architectural
Design
Manufacturing
Process
Control of
Activities
Total cost for the actual use of resources
227656
Total cost of resources not actually used
55391
Note: entities are the items (document, works etc) that are produced by activities.
7. Summery and Conclusion
Although a great interest in business ethics has been shown recently in the literature and an increasing number of
firms all over the world have adopted a Code of ethics, episodes of misconduct do not appear to be abating.
To overcome the gap between ethical principles and practice, this paper has suggested some basic stages that can
help the integration of values into corporate budgeting. In addition to the laudable initiatives to promote an ethical
corporate culture, the need for effective integration is essential, since the values are likely to be ignored in business
activities unless they are made visible in a concrete plan of action. For this purpose, this paper suggests an
approach that needs two general requirements: first, the managers’ ability to identify values concerning people
who have a direct or indirect relationship with the firm; second, the task of making a detailed account of the values
in Activity-Based Budgeting. More specifically, this paper proposes that budgeting should consider at least five
stages.
1) The first stage concerns the identification of ethical values. The choice of what constitutes a “value” should not
be left to the whim of managers and employees, but should be the result of a moral judgment in the true sense. In
brief, moral duty helps people who have a developed moral reasoning and enjoy freedom of choice to correctly
identify values and persuade the will to act for their achievement.
2) The identification of ethical values leads to the creation of an Ethical framework. An Ethical framework, in
contrast with the contents of a Code of ethics, shows in detail the values and circumstances concerning people,
causes, effects, mode and places that are relevant for describing them. The ethical framework, as a dynamic, not
static document, represents the first document for effective corporate planning with an ethical dimension.
3) The decision process needs a prior examination of the whole structure of an action, in all its distinctive parts, for
the achievement of the values that are going to be implemented in budgeting. No action taken to introduce a value
should prevent the affirmation of other values, whether in the system of values shown in the Ethical framework or
the values specifically involved in the preparation of the budget.
4) Due to several constraints on the quantity and/or quality of the factors of production available to the firm, it is
likely that managers have to choose a preference order for values. The budget can be prepared by starting with the
implementation of the values that have priority over others. Choices about priorities are made on the basis of a
moral judgment in the sense indicated earlier.
5) The key factor in this model is on the introduction of values into Activity-Based Budgeting. More specifically,
the budgeting process is carried out by incorporating the values into each single element of every activity. The
system is simulated to evaluate the efficiency and effectiveness of all activities. Software provides detailed
operational and financial reports on each activity and on the system as a whole.
The model proposed in this paper has important implications. The key points underlined in the model can help
managers to try to integrate effectively the values into the planning system because of the flexible and intuitive
Activity-Based Budgeting approach, the integration of values in budgeting should also have personal effects on
managers’ lives. Ethical behavior could be seen as a prerequisite for a happy life and for future action in the
pursuit of higher human values (Rego, Ribeiro, & Cunha, 2010; Fu et al. 2010). This study, however, has some
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Vol. 8, No. 20; 2013
limitations. Although this method is implemented in some firms as described in the sixth section, the integration of
values into Activity-Based Budgeting has received formally little attention in both research literature and real life.
We await the empirical evidence to confirm or refute the proposal suggested in this paper.
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