Towards an open systems approach to budgeting

The theory of open systems has been increasingly applied to the study of organizational planning and control systems. This is also true for the area of budgetary control. At present, however, there is a tendency for writers to treat the design problems as an either/or choice between an open or a closed system. This paper argues that the critical decision problem is where in a system closure can be most beneficially applied. It will show that the open systems view, with its emphasis upon the horizontal dimension in an organization, is better suited for designing effective budgetary control systems. The computation of budget variances is chosen as the key step at which the usefulness of this view can be fully appreciated. An alternative budget variances measurement scheme, based upon similar perspectives in the area of job design, is proposed. It is shown that variances computed under the proposed system more fully reflect the interacting nature of most organizations and provide better control information.