There are several approaches that may be used to develop the budget. Managers typically prefer an approach known as participative budgeting. Discuss this form of budgeting and identify its advantages and disadvantages.

Ans.

Also called bottom-up budgeting or self-imposed budgets, where the initial flow of budget data moves from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move upward in the organization.

Budget estimates prepared by lower-level managers should be scrutinized by higher levels of management. Without such a review, participative budgets may be too loose and allow much "budgetary slack." The result will be inefficiency and waste..

Advantages:

1. Individuals at all level of the organization are recognized as members of the team whose review and judgments are valued by top management.

2. Increase feeling of unit-level ownership in the budget

3. Leads to greater support for the budgetand a greater understanding of goals

4. Greater accuracy of budget estimates. Budget estimates prepared by front line managers can be more accurate and reliable than estimates prepared by top managers who are removed from day to day activities and who have less intimate knowledge of markets and operating conditions.

5. Motivation is generally higher when an individual participates in setting his or her own goal then when the goals are imposed from above. Self-imposed budgets create commitments.

6. Managers cannot blame unrealistic goals as an excuse for not achieving budget expectations.

Disadvantages:

1. Time consuming and costly.

2. May foster budgetary “gaming”