Participative Budgeting or Self Imposed Budgeting
Participative Budgeting or Self Imposed Budgeting:
Learning Objective of the article:
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.
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
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.
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.
A number of advantages or benefits are cited for such self imposed budgets.
Participative budget has following main limitations or disadvantages:
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