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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 transferral 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 (Nouri & Parker 1998). This
transferral 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 transferral 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 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
