The Pros and Cons of Participative Budgeting Essay

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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
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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

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