Which Of The Following Is A Potential Disadvantage Of Participative Budgeting?

which of the following is a potential disadvantage of participative budgeting?

The two activities of planning and control must go hand in hand. The comparison of actual results with a budgetary plan, and the taking of action to correct deviations, is known asfeedback control. Once the organisation has started out in the right direction it is the management’s responsibility to exercise control that will ensure that it continues on course. The short term for one organisation may be the medium or long term for another, depending on the type of activity in which it is involved.

  • This will then provide the basis for the preparation of several other budgets including the selling expenses budget and the production budget.
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  • Each of the types of planning should be accompanied by the appropriate control exercise covering the same time span.
  • Participative budgeting is a process under which people impacted by a budget are actively involved in the budget creation process.
  • Real participation and not pseudo-participation in the preparation of budgets by employees should be encouraged.

Cash budgets therefore forewarn managers of whether there will be cash surpluses or cash deficits and how long the surpluses or deficits are expected to last. This introduction should give participants an understanding of the works of the planning process and of the sort of information that they can expect to receive as part of the control process. Once the first set of budgets has been prepared, those budgets will be considered by senior managers. The effect of the change on all of the budgets will be calculated instantly so that managers can make better informed planning decisions. It is this master budget which is submitted to senior managers for approval because they should not be burdened with an excessive amount of detail. Production quantities would then have to be higher than the budgeted sales level.

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To make a good decision, there needs to be a good amount of information to base the outcome on. Information can include anything from charts and surveys to past sales reports and prior research. When making a decision primarily based on the information you are given from your organization, one can come to a conclusion in four different ways.

which of the following is a potential disadvantage of participative budgeting?

In order to eliminate undesirable pressure, the budget goals and standards should be set which are neither too high nor too low . If the standards and the budgeted goals are too high, motivation becomes poor and failing to achieve QuickBooks them may frustrate the managers and in turn, this frustration can result into poorer performance. A flexible budget, on the other hand, is a series of budgets prepared for various levels of activities, revenues and expenses.

It means that the subordinate managers will set targets that they are sure to achieve and even exceed in the next financial year. This mostly happens when the manager’s performance is measured on the basis of the attainment of the budget. By making the budget easy to achieve, the managers will be seen as exceeding their targets. Budgetary slack is the practice of overestimating the expenses and/or underestimating the projected revenues when preparing a budget statement for the next financial period.

Organizations use different types of budget controls such as top-down budgeting, bottom-up budgeting, zero-based budgeting, and flexible budgeting. Explore these types of budget controls and know how they are used by organizations to allocate finances and resources to different departments and projects. Budgeting means estimating the total revenue from different business activities and allocating income summary it towards the existing and future projects. It is done through the preparation of a written document called a budget. When the employees are old, experienced and skilled in their task, participative budgeting gives excellent results. The bottom level employees are more closely attached to the day to day operations so they have an in-depth idea about the working needs of respective departments.

What Is Budget Variance Analysis?

Budget is prepared for a certain period of time in the future. There are various methods of budgeting which can be used as per the organization’s needs. When participative budgeting is used throughout an organization, the preliminary budgets work their way up through the corporate hierarchy, being reviewed and possibly modified by mid-level managers along the way. A participative budgeting process will be more effective when the organization adopts a system of checks and balances to prevent unruly managers from abusing their power. Since the budget moves from the lower managers to the middle and then to the top management, the budget draft can be reviewed at each level of management, with the top managers having the final say.

which of the following is a potential disadvantage of participative budgeting?

The participative leader retains the responsibility of final compilation of the draft responses from all. It depends on the decision maker to compile the expert reports for the final response. Advantages of this type of decision-making process makes the group members feel engaged in the process, more motivated and creative. Expertise brings focused and result oriented solutions for BATNA as and when necessary. Best management outcomes are obtained by utilizing this strategy. An authoritative decision maker would have a higher rate of success than the Democratic decision maker.

A cash budget can give forewarning of potential problems that could arise so that managers can be prepared for the situation or take action to avoid it. However, the production budget cannot be prepared directly from the sales budget without a consideration of inventory policy. For example, if sales volume is the principal budget factor, the sales budget must be prepared first, based on the available sales forecasts.

What Is The Meaning Of Top Down Approach?

Pro-forma financial statements show forecasted sales and profits and all other financial statement figures. A business can use this information to determine whether it will meet its expected profit targets, how much money it must budget for certain expenses and how much cash it might have on hand.

Since companies must constantly upgrade and update their equipment, it’s no surprise that the capital expenditure budget is one of the most important documents that a company will produce. Due to less experience in the ground level scenario, he has to take suggestions from the bottom level people.

Weather conditions could increase shipping costs and result in delayed shipments to customers. Suppose the budget was set up with the expectation that sales would be $200,000 per month and labor cost was budgeted at $50,000 per month, or 25 percent of sales. More than likely, you dutifully prepare a static budget each year and put it in your desk drawer – and it’s not seen again until it’s time to prepare a new budget. Flexible budgets have distinct advantages over static budgets. After you get used to flexible budgets, they will become one of your favorite management tools.

CookieDurationDescriptioncookielawinfo-checbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. One disadvantage of the top-down approach is that lower-level managers may view the budget as a dictatorial standard. Further, such budgets can sometimes provide ethical challenges, as lower-level managers may find themselves put in a position of ever-reaching to attain unrealistic targets for their units. The advantage of this approach is that decisions can be made and implemented very quickly. The other benefit of top-down project planning is that it helps align the project goals with the organization’s strategic goals as upper management is giving the directions.

What Are Rolling Budgets?

However, involving the subordinate managers to coordinate the budget preparation process will benefit the company since these managers have better information about the running of their respective departments. Participative budgeting also tends to produce budgets that are more achievable since lower-level employees are better positioned to inform their supervisors where funds need to be allocated.

Accounting

Furthermore, the budget is prepared by those who have the best knowledge of their own specific areas of operation. On the positive side, top-down budgets can set a tone for the organization. They signal expected sales and production activity that the organization is supposed to reach. If a department does not achieve its budgeted results, the department manager may blame any other departments that provide services to it for not having adequately supported his department. The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation methods used. The process of creating a budget takes management away from its short-term, day-to-day management of the business and forces it to think longer-term.

What Information Does The Sales Budget Provide For Pro Forma Financial Statements?

In addition, its advantages contain budgetary responsibility and higher motivation to achieve the goals. Besides the desirable effects, participative budgeting has its undesirable effects these include time consuming, padding the budget. This tendency is more pronounced when employees are paid bonuses based on their performance against the budget. This budgetary slack problem can be mitigated by imposing a budget review by those members of management who are most likely to know when budgets are being padded, and who are allowed to make adjustments to it as needed. Only by following this approach can stretch goals be integrated into a budget.

Participatory Budget Process

This can be a problem if the market shifts in a different direction sometime during the budget year. In this case, the company should shift along with the market, rather than adhering to the budget. It is easy to lose sight of where a company is making most of its money, which of the following is a potential disadvantage of participative budgeting? during the scramble of day-to-day management. A properly structured budget points out what aspects of the business produce money and which ones use it, which forces management to consider whether it should drop some parts of the business or expand in others.

In top-down budgeting, a company’s high-level targets and goals are defined by senior management, and then managers are given an allocation from those targets. In this lesson, we’ll discuss why companies use this method and how the process works. In this type of budgeting, the Accounting Periods and Methods Top-level managers share the responsibility of taking budgetary decisions with the bottom-level managers. As a result, it gives them a sense of a better stake in the firm. Besides the desirable effects, participative budgeting has its undesirable effects for an organization.

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