Question

Case 9–46 Participative Budgeting (LO 9-2, 9-3, 9-9) Patricia Eklund, controller in the division of social services for the state, recognizes the importance of the budgetary process for planning, control, and motivational purposes. She believes that a properly implemented participative budgetary process for planning purposes and an evaluation procedure will motivate the managers to improve productivity within their particular departments. Based upon this philosophy, Eklund has implemented the following budgetary procedures.

     • An appropriation target figure is given to each department manager. This amount is the maximum funding that each department can expect to receive in the next year.

    • Department managers develop their individual budgets within the following spending constraints as directed by the controller’s staff.

            ◦ Expenditure requests cannot exceed the appropriation target. ◦ All fixed expenditures should be included in the budget. Fixed expenditures would include such items as contracts and salaries at current levels.

            ◦ All government projects directed by higher authority should be included in the budget in their entirety.

    • The controller’s staff consolidates the budget requests from the various departments into a master budget submission for the entire division.

    • Upon final budget approval by the legislature, the controller’s staff allocates the appropriation to the various departments on instructions from the division manager. However, a specified percentage of each department’s appropriation is held back in anticipation of potential budget cuts and special funding needs. The amount and use of this contingency fund is left to the discretion of the division manager.

    • Each department is allowed to adjust its budget when necessary to operate within the reduced appropriation level. However, as stated in the original directive, specific projects authorized by higher authority must remain intact.

    • The final budget is used as the basis of control. Excessive expenditures by account for each depart-ment are highlighted on a monthly basis. Department managers are expected to account for all expenditures over budget. Fiscal responsibility is an important factor in the overall performance evaluation of department managers.

Eklund believes her policy of allowing the department managers to participate in the budgetary process and then holding them accountable for their performance is essential, especially during times of limited resources. She further believes that the department managers will be positively motivated to increase the efficiency and effectiveness of their departments because they have provided input into the initial budgetary process and are required to justify any unfavorable performances.

Required:

        1. Describe several operational and behavioral benefits that are generally attributed to a participative budgetary process.

        2. Identify at least four deficiencies in Patricia Eklund’s participative policy for planning and perfor-mance evaluation purposes. For each deficiency identified, recommend how it can be corrected.

Answer 1

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Describe several operational and behavioral benefits that are generally attributed to a participative budgetary process?

The Participatory Budgetary Process serves several advantages within an organization for managers. The most important fact about this process is that it involves the participation of managers from all levels within the organization / departments and, with mutual consent, the final decision on budget allocation is taken. It acts as an significant sign for companies in budget execution as the participation of all managers creates a sense of obligation in managers and they work within the defined budget to achieve goals.

Another advantage is that the participatory approach encourages various managers to use their experience because they are all interested in the process of budget making, and their feedback can be beneficial to the company. The mechanism also provides a clear medium for contact between departments / divisions / managers, thereby allowing a clearer understanding of departmental internal objectives and helping to create cohesion within the organisation. This also helps prevent disputes, which contributes to an organization's overall improved efficiency.

Identify at least four deficiencies in Patricia Eklund’s participative policy for planning and performance evaluation purposes. For each deficiency identified recommend how it can be corrected?

Patricia Eklund’s Participative Policy has following deficiencies:

The estimated budget cap that each department will receive next year is rather restrictive and could hamper the organization's prospects because the organization will have to lose some vital projects due to a lack of budget. Such rigidity in spending that does not reach the appropriation goal can prove costly in terms of decreased production. There must be some form of flexibility in adjusting the budget during the year as any lucrative projects arrive for department or company.

Another issue is that costs such as wages and contracts must be included in the budget despite the fact that these costs are of a fixed nature and must be incurred irrespective of event. Since these expenses are uncontrollable, there would be no room from the available budget for cost reduction or reducing other expenses. For example , companies should attempt to reduce reliance on cost management measures if these unavoidable or fixed costs are high, then the budget should be divided for controllable activities and such fixed costs should be viewed as default costs.

Creating a contingency fund by holding some of their funds may not be the right approach because it may not be appropriate to take a specific proportion of each department when some departments have good prospects but they may fail due to lack of funds. Consequently, holding back the proportion of funds should not be focused on a strict rule of taking back a fixed proportion, but instead it should rely on allocating contingent funds or retaining funds depending on the respective departments' potential prospects.

Another flaw in the process is that cost management or fiscal responsibility here is viewed as a monitoring mechanism as well as performance assessment. This is not right to use this performance assessment criterion alone, because there are various ways of evaluating success because good or bad. Often the costs could have been surpassed but additional excess returns could be given. The benefit part will also always be measured, rather than just the costs that surpass the budget.

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