Question

Budgets are used in many organisations in order to fulfil a variety of purposes. When preparing and using the budgets, however, the management accountant must be aware of their behavioural implications. Identify and explain 5 purposes of budgets Explain the difference between participative and non-participative budgeting and explain their advantages and disadvantages.

Answer 1

Five purposes of budgets :

a. Budggeting is a tool for planning and control. When a budget is being formulated, departments analyze their plans for the future, and submit estimates as per their requiremeents, justifying each of their demands by demonstrating a need.

b. Budgeting compels and motivates managers to make an early and timely study of its problems. It therefore generates a sensse of caution and care.

c. Budgeting provides a tool through which managerial policies and goals are periodically evaluated, tested and established as guidelines for the entire organization.

d. Budgeting helps in directing capital and other resources into the most profitable channels.

e. Budgeting, coupled with standard costing provide with yardsticks for measuring performance of individual departments, against which actual performance is measured, leading to a variances, and the variances can be analyzed as per their originating causes, and corrective actions can be taken for unfavorable variances. This leads to budgetary control.

Participative budgeting, which involves decentralization of power, is a process where all people impacted by a budget are actively involved in the budget preparation process. This is a bottom-up approach, where employees and the senior management are involved in the budgeting process, and therefore is more achievable. When participative budgeting is used, the preliminary budgets work their way up through the corporate hierarchy, being reviewed and possibly modified by mid-level managers along the way.

Benefits of participative budgeting :

• It boosts the morale of employees.
• It casts responsibility on the employee to acheive the budgets, and the employees are more accountable
• It leads to greater job satisfaction
• It increases the productivity of all concerned with the preparation of budgets
• Budgets are more realistic, as those contributing the budget are more aware of the ground realities.

Disadvantages of participative budgeting:

• It is time consuming to prepare.
• Budgetary slack is a common problem with participative budgeting.
• Budgets tend to be conservative.

Non-participative budgeting is an authoritative budget. It is a top-down budget, which begins begin with upper level management establishing parameters under which the budget is to be prepared. Lower-level employees provide little input in setting the overall goals of the organization as they are essentially reduced to doing the basic budget calculations consistent with directives.

The employees therefore have little ownership, and they view the budgets as dictatorial.