The Role of Participation in Budgeting

The Role of Participation in Budgeting

Introduction

Although participation in budgeting may enforce the managerial performance, it has constrains and can cause some problems as well. This article analyses the possible advantages and limitations of the role of participation in budget setting. In the next section, the possible merits of budgetary participation are demonstrated. This is followed by a section that explains the equivocation existing in the relationship between budgetary participation and performance. Then, in the following section, some negative effects on the application of participation in budgeting progress are illustrated. The final section is the conclusion of the study.

The Possible Advantages of Budgetary Participation

According to the definition of budgeting, it is the ÐŽ®estimation of all income and expenses for an accounting period or financial forecasting, planning, and controllingЎЇ. (http://www.yourwebassistant.net/glossary/b11.htm#budgeting)

Comparing the budget with the real achievement of the company, it is possible to improve the decision-making process for the future development of the enterprise. So budgeting takes a crucial role in management accounting. Therefore, studying how to make budget setting more effective is important for the benefit of the enterprise.

Participation in budgeting is one of the useful approaches. It bears some possible advantages, which may enhance managerЎЇs commitment to budget objectives.

The following discussion (adapted from Lecture notes by Professor S. G. Ogden, 2004) bears the assumption that there is positive relationship between participation and performance. The contradictions will be discussed later in the following sections.

First of all, participation in budget setting can inspire the enthusiasm of the managers. Then they will intend to input more energy and time into the work to meet the budget targets. Because if they are involved in the process of budget setting, they will link it with their own knowledge, experience, and so on to make the judgment. This linkage renders the target of the company to be the participatorЎЇs personal target.

Secondly, participation may encourage the creation of the participators. Creation is the characteristic of human beings. However, not everybody at any time has the motivation to create. When the budget is settled, and what the managers and employees have to do is just to meet the budget, they will not care about how to improve the budget, but just focus on how to achieve the seemly pleasing result.

Thirdly, participation in budgeting could improve the communication between the budgetary setters and the participators. In fact, no matter to what extent employees involved into participation, there should be somebody to make the last decision. Then what is the meaning of participation? The answer is better communication. Application of budgetary participation could make the thoughts of the employees and junior managers upward to the budget setters, and at the same time, the aim of the budgeting is passed to the participators. The involvement makes the participators understand more about the holistic blueprint of the company, not just the plan for oneself, and at the same time, renders the budget setters realize the difficulties for the participators to accomplish the budget objectives. It is good for the harmonious development among different departments, associates and subsidiaries of the whole company. Otherwise, the unbalanced growth is not beneficial for the enterprise in the long run.

Fourthly, budgetary participation will make the budget more appropriate, namely, achievable. Sometimes, the budget is disappointing for employees and managers, as they are too hard to accomplish. This can cause negative effects on the performance. If people think that it is impossible to achieve the budget on time, they will either reduce the quality of the work to just meet the measurement criteria of the performance or do things even more slowly as if there is no budget at all. Both of the responses are harmful to the company.

However, when the participators join in the progress of budget setting, they can negotiate with the foreman to get the suitable budget targets. Anyway, only the employees and managers are familiar with their production capacities, and hence their suggestions appear to be more applicable for their specific situations.

There are some empirical evidences to support the argument above, such as Bass & Leavitt (1963) and Brownell (1982) according to Chenhall and Brownell (1988). However, the participation in budget setting seems to cause as many problems as it does for solutions. The problems will be discussed in the following section.

The Equivocation of the Relationship of Budgetary Participation and Performance

In the last part, it is discussed the possible advantages of participation in budget setting. The reason why it is possible is that, according to the previous theoretical and empirical studies, the relationship between the budgetary participation and the managerial performance is ambiguous.

Does budgetary participation really improve the performance? Or are they negatively related? Is it possible that there is no significant relationship between these two terms? There is no consensus on this issue, as there are empirical evidences supporting every perspective. Different researches reached different results. In the article by Chenhall and Brownell (1988), ÐŽ®results range from strong positive effects of participation on performance (Bass & Leavitt, 1963; Brownell, 1982), to unclear or insignificant effects (Milani, 1975; Kenis, 1979), to even negative effects (Bryan & Locke, 1967; Stedry, 1960)ЎЇ.( Chenhall and Brownell, 1988, pp. 225.)

Two possible explanations for these inconsistent findings are provided as follows.

On the one hand, the effectiveness of participation may relate to the specific circumstances. (Milani, 1975; Chenhall and Brownell, 1988) Different national cultures, different environments of the firms, different positions of the participators in the specific companies, and so on, all kinds of variables (contingency variables) are inclined to affect the relationship between budgetary participation and performance. That is why under certain circumstances, the participationЎЇs effect on the outcome is positive, while under other circumstances is negative. So ÐŽ®the failure to carefully account for the circumstances in which participation ÐŽ®worksЎЇ, versus those when it does not, would