Advantages and Disadvantages of Participative Budgeting

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 more volatile tasks than non consultative budgeting (Lau & Tan 1998)

The disadvantage of subordinate/superior information transferral is, of course, that the information supplied by the subordinate may not be entirely accurate; the budget estimations may be overstated to make the subordinate’s job easier to achieve. The difference between the true estimated budget and the overstated budget is known as budgetary slack. The reason for padding out the budget is to allow for any unsuspected environmental changes that may take place (Dunk 1990). In 1973 it was found that 80% of managers pad out their budgets and nowadays with increased pressure to perform it is likely to have increased (Prendergast 1997). Many managers intentionally pad out the budgets because they believe that it is likely to be reduced regardless, and therefore it is better to overestimate than be accurate. Conversely most superiors cut budgets because they believe that most budgets are padded (Hilton 1994).

Budgets may also be padded out because of the belief that the bigger the budget the more important the manager is perceived to be (Hilton, Langfield-Smith & Thorne 1998). Participative budgeting may result in slack budgets, but a lack of participation may result in budgets that provide subordinates with inadequate resources to perform well. However padding of the budget can be minimised through negotiation with the subordinate, by treating a budget as a negative evaluative tool, and perhaps even allowing some discretion to exceed budget costs when necessary (Hilton 1994).

Participative budgeting is also beneficial as it can lead to greater job satisfaction of the subordinate, as he or she believes that they have influenced the final budget and contributed as a team member. In addition they may feel that their views or judgements have been heard and are valued by top management. As a result of this satisfaction the subordinate is more likely to work at fulfilling a budget that they have participated in rather than working to a budget imposed on them from above without any consultation. A subordinate is likely to be more satisfied and perform a lot better if he or she believes that they have had a chance to participate in the decision making process and that their superiors have been neutral and without bias in terms of procedural justice (fairness of procedures) and distributive justice (fairness of standards) (Lindquist 1995).

The disadvantage of this aspect of participative budgeting is that there are many factors involved in achieving what is believed to be distributive justice and procedural justice. A subordinate’s participative input in the budget making process can range from no input (no control), to just a voice or opinion (low process control), to a vote and decisional role (high process control) (Lindquist 1995).