Subordinate's Participative Input In The Budget example essay topic

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 transfer ral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget.

Participative budgeting has the advantage of transferring information from the subordinate to their superior This knowledge is likely to be more reliable and accurate as the subordinate has direct contact with the activity and therefore is in the best position to make budget estimates. 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 (Nour i & Parker 1998). This transfer ral 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 (Lau & Tan 1998) The disadvantage of subordinate / superior information transfer ral is, of course, that the information supplied by the subordinate may not be entirely accurate; the budget estimations may be overstated to make the subordinate's job easier to achieve. The difference between the true estimated budget and the overstated budget is known as budgetary slack.

The reason for padding out the budget is to allow for any unsuspected environmental changes that may take place (Dunk 1990). 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, Lang field-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 minimise d 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 judgement's 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 participated in rather than working to a budget imposed on them from above without any consultation.

A subordinate is likely to be more satisfied and perform a lot better if he or she believes that they have had a chance to participate in the decision making process and that their superiors have been neutral and without bias in terms of procedural justice (fairness of procedures) and distributive justice (fairness of standards) (Lindquist 1995). The disadvantage of this aspect of participative budgeting is that there are many factors involved in achieving what is believed to be distributive justice and procedural justice. A subordinate's participative input in the budget making process can range from no input (no control), to just a voice or opinion (low process control), to a vote and decision al role (high process control) (Lindquist 1995). A subordinate who is permitted an opportunity to vocalist their feelings and opinion towards the budget setting process are significantly more satisfied with the budgets they received than subordinates who are allowed no input at all, even when the budget is seen to be distributively unjust.

This basically means that allowing a subordinate to vent their frustrations can have a positive effect on the firm. However, a subordinate would rather no voice at all if he or she doesn't believe that they are being valued or heard. In this situation it becomes a state of pseudo-participation when the subordinate has less input and is only made to feel like they are participating, which can lead to job dissatisfaction and frustration (Lindquist 1995). According to a recent study (Libby 1999) a subordinate who has voiced their opinion but has had little influence over the final budget is still positive and increases their performance as long as an explanation is given to the subordinate as to why they had so little influence. In this case the subordinate believes the budgeting process is significantly fairer. Participative budgeting can lead to increased job performance through goal congruence and negotiations.

The subordinate who participates in the goal setting process believes in the work they are doing and takes responsibility for the budget as their own (Hilton 1994). As such they work harder to achieve the budget, as it is self-imposed and they are not able to blame others if budget specifications cannot be met. The self-imposed budget (a budget brought about by participation) acts as a system of control (C halos & Haka 1989). Negotiations also help develop more effective problem-solving skills in workers by discussing opposing views with an open mind and allowing for negotiations (Fisher, Fredrickson & Peffer 2000). This also builds stronger team bonds and dynamics between different managers.

These skills can also carry over to other decision-making situations, such as to future strategic planning situations (Gre we, Marshall and O'Toole 1989). 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 (Hilton 1994). 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.

For example, if one negotiator has a competitive behaviour rather than a cooperative behaviour then it will most likely make the other negotiator adopt a more competitive attitude and thus decrease the likelihood of inducing counteroffers that can lead to an agreement (Fisher, Fredrickson & Peffer 2000). Negotiations can also cause those involved who disagree in significant and irreconcilable ways to accentuate those differences (Hilton 1994). In conclusion, the advantages of participative budgeting include an increase and transfer ral of information, an increase in subordinate morale and job satisfaction, the development of negotiation skills and goal congruence. However these advantages only come into full affect when particular conditions are present, without these conditions it may turn into a disadvantage through budgetary slack, low job satisfaction and responsibility.