Participative budgeting and its advantages

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Budgets provide a means of co-ordination of the business as a whole. In the process of establishing budgets, the various factors like production capacity, sales possibilities, and procurement of material, labour, etc. are balanced and co-ordinates so that all the activities proceed according to the objective. For this purpose a budget committee is formed which includes all the departmental heads together to solve a common problem.

The need for co-ordination in the planning process is immense. The interrelationship between the functional budgets (e.g. sales production, purchasing) means that one budget cannot be completed without reference to several to several others. 

A budgeting system in which all budget committee members are given the opportunity to apply their own budgets in practice. This is known as ‘bottom-up budgeting’. It contrasts with imposed or top-down budgets where the ultimate budget holder does not have the opportunity to participating in the budgeting process.

The advantages of participative budgeting:

• Improved quality of forecasts to use as the basis for the budget: Managers who are doing a job on a day-to-day basis are likely to have a better idea of what is achievable, what is likely to happen in the forthcoming period, local trading conditions, etc.

• Improved motivation: Budget holders are more likely to want to work to achieve a budget that they have been involved in setting themselves, rather than one that has been imposed on them from above.

• Better results: being the executor of the budget the applicant can control the costs better than any other manager.

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