Participative budgeting is the situation in which budget are designed and set after input from subordinate managers, instead of merely being imposed. The purpose of participation in budget setting is to divide responsibility to subordinate managers and set a form of personal ownership on the final budget. The budgeting approach in which the subordinate participates in budget setting, they provide their own information that the supervisors use to formulate the self-imposed budget or participative budget. Organization performance is expected to be well improved by making it possible for the supervisor to allocate the resources more efficiently. According to the information provided by the subordinate, the right resources-allocation decisions are making, the participative budgeting will improve the organization performance.
Participation in budget setting has its desirable effects on an organization performance these include the transference of information from subordinate to superior so that it can increase subordinate’s job satisfaction. In addition, its advantages contain budgetary responsibility and higher motivation to achieve the goals. Besides the desirable effects, participative budgeting has its undesirable effects these include time consuming, padding the budget. However, the condition which determines the success of a participative budget depends on various factors such as job related information, the level of participation, the level of subordinate influence and complexity of budget.
Advantages of Participative Budgeting
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. Transferring information from subordinate to superior is one of the participative budget setting advantages. Subordinates have opportunities to contact directly to the superior and discuss organizational issues with the superior so that they can exchange the information and ideas can solve the problems and unite future point of views. The transferal of information is particularly important when high difficult task is being deal with, the more difficult the task is, the greater the need for subordinate’s consultation.
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. This transferal 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. In addition, when people participate in setting a budget, they are recognized as members of a team, they share budgetary responsibility and motivation is higher when they together accomplish their own goals rather than the goals are imposed.
Disadvantages of Participative Budgeting
Besides the desirable effects, participative budgeting has its undesirable effects for an organization. Time consuming is the biggest disadvantage of participation in budget setting. Vacillation and delay can be made when too many meetings are hold.
The disadvantage of budgetary negotiation is that a situation of too much participation can arise, resulting in negotiations that drag out and lead to vacillation and delay. If a negotiation does not reach an agreement, in which the superior may have a final say in the matter, this too can be detrimental to the business because it only serves to lower the morale of the manager, and confidence in the work he or she is trying to achieve. Secondly the attitudes of the negotiators can greatly affect the outcome.
Budgetary slack is another undesirable effect, happens because of overestimation of expense that can foster budgetary “gaming” through budgetary slack. Unless incentives to accurate projects are provided, padding the budget can be severe.