What is participative budgeting?

Participative budgeting is a budgeting process under which those people impacted by a budget are involved in the budget creation process. This bottom-up approach to budgeting tends to create budgets that are more achievable than are top-down budgets that are imposed on a company by senior management, with much less participation by employees. Participatory budgeting is also better for morale, and tends to result in greater efforts by employees to achieve what they predicted in the budget. However, a purely participative budget does not take high-level strategic considerations into account, so management needs to provide employees with guidelines regarding the overall direction of the company, and how their individual departments fit into that direction. When participative budgeting is used throughout an organization, the preliminary budgets work their way up through the corporate heirarchy, being reviewed and possibly modified by mid-level managers along the way. Once assembled into a single master budget, it may become apparent that the submitted budgets will not work together, in which case they are sent back down to the originators for another iteration, usually with guidelines noting what senior management is looking for. Because of the larger number of employees involved in participatory budgeting, it tends to take longer to create a budget than is the case with a top-down budget that may be created by a much smaller number of people. Another problem with participative budgeting is that, since the people originating the budget are also the ones whose performance will be compared to it, there is a tendency for participants to adopt a conservative budget with extra expense padding, so that they are reasonably assured of achieving what they predict in the budget. This tendency is more pronounced when employees are paid bonuses based on their performance against the budget. This problem of budgetary slack can be mitigated by imposing a review of the budgets by those members of management who are most likely to know when budgets are being padded, who are allowed to make adjustments to the budget as needed.

Advantages and Disadvantages of Participative Budgeting Participative Budgeting is the situation in which budgets are designed and set after input from subordinate managers, instead of merely being imposed. The idea behind this sort of budgeting is to assign responsibility to subordinate managers and place a form of personal ownership on the final budget. Nearly two decades of management accounting research has resulted in equivocal findings on the consequences and effects of participative budgeting (Lindquist 1995). Participative budgeting certainly has various advantages, these include the transferral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget. Participative budgeting has the advantage of transferring information from the subordinate to their superior This knowledge is likely to be more reliable and accurate as the subordinate has direct contact with the activity and therefore is in the best position to make budget estimates. Participative Budgeting also gives subordinates the opportunity to discuss organisational issues with superiors, in which an exchange of information and ideas can help to solve problems and agree future actions (Nouri & Parker 1998). This transferral of information is important particularly when dealing with a matter of high task difficulty as, the more difficult a task, the greater the need for consultation with subordinates. Participative budgeting has a higher performance rate when dealing with more difficult and...

1. How does a budget relate to the three management functions (planning, directing/motivating, and control)? Planning Budget is managements plan for a specific period expressed in financial terms. Directing Budget is primary way to communicate agreed-upon objectives to all parts of company Motivating Budget may inspire higher levels of performance or discourage additional effort Control Budget is an important basis for performance evaluation once adopted, it also assesses success of companys operations 2. What are the benefits of budgeting? 1. Requires all levels of management to plan ahead. 2. Provides definite objectives for evaluating performance at each level of responsibility. 3. Creates an early warning system for potential problems (control). 4. Motivates personnel throughout the organization to meet planned objectives. 5. Facilities coordination of activities within the organization. 6. Results in greater management awareness of entitys overall operations and their relationship to external factors such as the economy. 3. How does budgeting differ from long-range planning? Budget more detail oriented and focused on short term goals (vs. long term goals and strategies to achieve) 4. What is participative budgeting? What are the advantages and disadvantages? Each level of management participates in budgeting process. Advantages: More accurate budget estimates since low level managers have more detailed knowledge of their areas Perceived as fair due to involvement of lower level management Disadvantages: Time consuming and costly May foster budgetary gaming through budgetary slack