Participative Budgeting or Self Imposed Budgeting


Participative Budgeting or Self Imposed Budgeting:

Learning Objective of the article:

  1. Define and explain the term “self imposed or participative budgeting” in managerial accounting.
  2. Explain the importance and use of a participative or self imposed budget in business.
  3. What are advantages and disadvantages of self imposed budgeting?

The success of a budget program will be determined in large part by the way in which the budget is developed. In the most successful budget programs, managers with cost control responsibilities actively participate in preparing their own budgets. This is in contrast to the approach in which budgets are imposed from above. The participative approach to preparing budgets is particularly important if the budget is to be used to control and evaluate a manager’s performance. If a budget is imposed on a manager from above, it will probably generate resentment and ill will rather than cooperation and commitment.

  1. Definition and explanation of self imposed budgeting or participative budgeting
  2. Advantages and disadvantages of participative or self imposed budget

Definition and Explanation of Participative or Self Imposed Budgeting:

The budgeting approach in which managers prepare their own budget estimates is called self imposed budgeting or participatory budgeting. This is generally considered to be the most effective method of budget preparation. Managers at all levels participate and coordinate with each other in budgeting process.

THE INITIAL FLOW OF BUDGET DATA IN A PARTICIPATIVE BUDGETING SYSTEM

Top Management
Middle Management Middle Management
Supervisor Supervisor Supervisor Supervisor

The initial flow of budget data in a participative system is from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move upward in the organization.

Once self imposed budgets are prepared, are they subject to any kind of review? The answer is yes. Budget estimates prepared by lower-level managers should be scrutinized by higher levels of management. Without such a review, self imposed budgets may be too loose and allow much “budgetary slack.” The result will be inefficiency and waste. Therefore before budgets are accepted, they must be carefully reviewed by immediate superiors. If changes from the original budget seem desirable, the items in question are discussed and modified as necessary.

All level of an organization should work together to produce the budget. Since top management is generally unfamiliar with detailed, day to day operations, it should rely on subordinates to provide detailed budget data. On the other hand, top management has an overall strategic perspective that is also vital. Each level of responsibility in an organization should contribute in the way that it best can in a cooperative effort to develop an integrated budget.

In Business | Cutting Slack in Ireland:A study of budgeting in four Irish businesses provides some interesting insights into controlling budgetary slack. It appears that one of the best ways to control budgetary slack is to have management accountants who fully understand the operational side of the business. As one operating manager put it, “Finance [i.e., management accountants] understand my budget completely. There is no slack or opportunity for slack.” In contrast, budgetary slack was greatest in a subsidiary of a company headquarter in North America whose management accountants least understood the operating side of the business and yet always insisted that the budget be met. In fact, in this particular organization, corporate headquarters had previously ordered the Irish subsidiary midway through a year to deliver additional cost savings to make up for poor performance elsewhere in the corporation. Not surprisingly, the managers of the Irish subsidiary now routinely pad their budgets in case this happens again.

Source: Paul Prendergast, “Budget Padding: Is is a job for the finance police?” Management Accounting (UK) November 1997, pp. 44-46.

Participative or Self imposed budgeting is an ideal budgetary process. However most companies deviate from this ideal budgetary process. Typically top managers initiate the budget process by issuing broad guidelines in terms of overall target profits or sales. Lower level managers are desired to prepare budgets that meet those targets. The difficulty is that the target set by top managers may be unrealistically high or may allow too much slack. If the budgets are too high and employees know they are unrealistic, motivation will suffer. If the targets allow too much slack, waste will occur. And unfortunately top management is often not in a position to know whether the targets they have set are appropriate.

Admittedly, however, a pure self imposed budgeting system is not without limitations. It may lack sufficient strategic direction and lower level managers may be tempted to build into their budgets a great deal of budgetary slack. Nevertheless, because of the motivational advantages of self imposed budgets, top managers should be cautious about setting inflexible budgets.

Advantages and Disadvantages of Self Imposed Or Participative Budget:

A number of advantages or benefits are cited for such self imposed budgets.

  1. Individuals at all level of organization are recognized as members of the team whose review and judgments are valued by top management.
  2. Budget estimates prepared by front line managers can be more accurate and reliable than estimates prepared by top managers who are more remote from day to day activities and who have less intimate knowledge of markets and operating conditions.
  3. Motivation is generally higher when an individual participates in setting his or her own goal then when the goals are imposed from above. Self imposed budgets create commitments.
  4. If a manager is not able to meet the budget and it has been imposed from above, the manager can always say that the budget was unreasonable or unrealistic to start and, therefore, was impossible to meet. With a self imposed budget this excuse is not available.

Participative budget has following main limitations or disadvantages:

  1. Time consuming and costly.
  2. May foster budgetary “gaming” through budgetary slack

You may also be interested in other articles from “Budgeting and planning” chapter:

  1. Profit Planning
  2. Participative or Self Imposed budgeting
  3. Human Factors in Budgeting
  4. Zero Based Budgeting (ZBB)
  5. Budget Committee
  6. Master Budget
  7. Sales Budget
  8. Production Budget
  9. Inventory Purchases Budget for a Merchandising Firm
  10. Material Budgeting | Direct Materials Budget
  11. Labor Budget
  12. Manufacturing Overhead Budget
  13. Ending Finished Goods Inventory Budget
  14. Selling and Administrative Expense Budget
  15. Cash Budget
  16. Budgeted Income Statement
  17. Budgeted Balance Sheet
  18. International Aspects of Budgeting

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