Participative Budgeting or Self Imposed Budgeting:
Learning Objective of
- Define and explain the term "self imposed or
participative budgeting" in managerial accounting.
- Explain the
importance and use of a participative or self imposed budget in
- 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.
Definition and explanation of self imposed budgeting or participative
Advantages and disadvantages of participative or self imposed budget
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.
FLOW OF BUDGET DATA IN A PARTICIPATIVE BUDGETING SYSTEM
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
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
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
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
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
A number of advantages or benefits are cited for such self imposed budgets.
Individuals at all level of organization are recognized as members of the
team whose review and judgments are valued by top management.
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
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.
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
- Time consuming and costly.
- May foster budgetary
“gaming” through budgetary slack