(c) Participation in the budget-setting process
There are essentially two ways in which a budget can be set: from the top down or from the
bottom up.
In the top-down approach to budgeting, top management prepare a budget with little or no input
from operating personnel which is then imposed upon the employees who have to work to the
budgeted figures.
The advantages of this approach are that strategic plans are likely to be incorporated into
planned activities; coordination between the plans and objectives of divisions is enhanced;
senior management's awareness of total resource availability is used; the period of time taken to
draw up the budgets is decreased.
The disadvantages of top-down budgeting are dissatisfaction, defensiveness and low morale
amongst employees; the acceptance of organisational goals and objectives could be limited; the
feeling of the budget as a punitive device could arise; lower-level management initiative may be
stifled.
In the bottom-up approach to budgeting, budgets are developed by lower-level managers who
then submit the budgets to their superiors. The budgets are based on the lower-level managers'
perceptions of what is achievable and the associated necessary resources.
The advantages of participative budgets are they are based on information from employees most
familiar with the department; morale and motivation is improved, resulting in improved
quality of the decisions made; they increase operational managers' commitment to
organisational objectives; co-ordination between units is improved; specific resource requirements
are included.
There are, on the other hand, a number of disadvantages which Villa Homes should consider
before introducing participative budgets. They consume more time, meaning an earlier start to
the budgeting process could be required; changes implemented by senior management may
cause dissatisfaction; they may cause managers to introduce budgetary slack; setting easy
targets which they know are achievable.
The allocation of overheads in Villa Homes is likely to vary considerably depending on the size,
complexity and value of the furniture being assembled. It is, therefore, important to involve
employees with detailed knowledge of the process. This will not only draw on useful experience
but also increase motivation and commitment. A participative budgeting approach would
therefore be worthwhile adopting as long as Villa Homes are mindful of the disadvantages and are
careful to ensure budgetary slack is avoided.
Negotiated style of budgeting
Many organisations in practice develop a budget setting process that incorporates elements of
both approaches, where budgets are agreed by a process of negotiation. A negotiated budget
is a 'budget in which budget allowances are set largely on the basis of negotiations between
budget holders and those to whom they report.' |
