Question

Summarise the advantages and disadvantages of participative budgeting.

Answer 1

Ans: Advantages:

1. It is better for motivation because it boosts the morale of employees.
2. Participation puts the responsibility on the employees. The ones who are responsible for a particular task, later on, become answerable for the same. As a result, it increases the accuracy of the budget and make employees more accountable.
3. It increases employees job satisfaction. Because they feel that the management gave them an important task.
4. Employees put more effort to achieve the standards they have set for themselves. Therefore, it increases their productivity.
5. It saves the time of the strategic managers at the top-level. Further, they can focus on key issues more.
6. It increases creativity among stakeholders consequently prepares future managers.
7. This budget is more realistic. The reason is that it is prepared by the people who have sound technical knowledge of the relative departments.

DISADVANTAGES OF PARTICIPATIVE BUDGETING

1. It is time-consuming for lower management.
2. Participative budgeting involves a large number of people. Hence, resulting in high labor cost.
3. Focus on individual department growth is more.
4. Conservative Budget: Easily achieved targets decrease the potential performance levels of the employees. On the contrary, too tight budgets lay tough targets. It may demotivate employees. It Increases stress levels & pressure. Managers have to assume that the employees acted in good faith. For instance, bad faith is over-allocation or under-allocation of resources.
5. Budgetary Slack: Padding the budget is another name for budgetary slack. It exists when a manager deliberately underestimates income & profits or overestimates expenses and losses.
   The budget creators keep an extra expense while preparing the budget. There are more chances of this to happen when the performance appraisal is based on the performance against budget. Issue of budgetary slack can be resolved if there is a review committee to cross-check the budgets prepared by key employees. Such employees know when the budgets are cushioned, further who are involved in the modification process.
6. “Pseudo participation”: This is an arrangement where top management assumes total control of the budgeting process. As a result, asking only superficial participation from lower-level managers. Top managers simple obtain formal approval of the budget from subordinate managers, not seeking real input.