The Role of Participation in Budgeting
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 estimation of all income and expenses for an accounting period or financial forecasting, planning, and controlling. (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 managers 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 participators 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), 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).( 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 participations effect on the outcome is positive, while under other circumstances is negative. So the failure to carefully account for the circumstances in which participation works, versus those when it does not, would explain the variety of results. (Chenhall and Brownell. 1988. pp. 225.) This view is regarded as the contingency model view.
One example is the field study by Milani (1975). His study used the sample of the lowest level foremen at the plant in a large international producer of heavy equipment. His result was that budget-setting participation related well with attitudes toward the job and the company, but the relationship with performance is, at best weakly supported. (ibid. pp. 282.) So no answer was given whether participation or nonparticipation should be adopted in the budget setting. One possible reason of the ambiguous result is the lack of control of other variables which may affect the validity of the study. These variables are changed due to the different circumstances of the company. Another potential reason was the use of one firm. So the result might be just applicable in this kind of firm.
On the other hand, namely, another possible explanation of the equivocation is that the effect of budgetary participation on performance is not direct. (Chenhall and Brownell, 1988) That is, there is no study that can support evidence of simple, direct effects of participation on job satisfaction or performance. (ibid. pp. 226.) The relationship is indirectly related via some intervening variables. This interpretation is regarded as the intervening variable model. It contrasts with the contingency model, and should be viewed as entirely complementary to it.
For example, in the research of Brownell and McInnes (1986), they failed to confirm that budgetary participation, through its effect on motivation, enhances managerial performance. (pp. 596-597.) Though significant positive relationship was found in the study between participation and managerial performance, only a small part of this is caused by the intervening variable of motivation.
Another example is the study of Chenhall and Brownell (1988). They collected the data by survey questionnaires from 36 middle-level managers of a large manufacturing company. Their study found out that the relationship of participation with job satisfaction is significant, but insignificant with performance. This is because of an important intervening variable in the relationship between participation and both job satisfaction and performance: role ambiguity. Participation can reduce the role ambiguity and hence improve the degree of job satisfaction and performance.
The Negative Effect of Budgetary Participation on Performance
Given that the ambiguity between budgetary participation and performance is ruled out, there are still many problems may be caused by the participation in budget setting.
The most important possible negative result of participation is budget slack. As mentioned in the prior section, sometimes the budget is too difficult to accomplish. It is common that nobody wants too much pressure from the senior supervisors, so easier budget objectives are proposed by the participators.
It is easy to understand that the demanding budget is more effective than the less difficult budget. If the budget is too easy to achieve, no one will be hard-working, but if the budget is a bit hard to obtain, people will be more serious about the work.
However, easy target is the preference of the employees and managers, especially when their performance measurement is related to the accomplishment of the budget. Therefore, if the budget is set according to the opinion of the participators, the targets intend to be more relaxed than they need to be. The result is that a budget that is easily achievable but acceptable by senior managers is set. It is by no means good for the development of the company.
Another problem of budgetary participation is that to what extent the participator should be involved. Should they have the voting chance to decide the budget decision? It is a complex issue. On the one hand, if the participators have no decision right, the budget is still set by the upper level, what is the meaning of participation? Participation will become a useless form to show the democracy. On the other hand, if the participators have the equal opportunity to make the decision, it will be very difficult for the decision-making process. Everybody has his/her own interest and opinion, so it is extremely difficult to achieve consensus. The budget setting progress will be time-consuming and low effective. Therefore, it is the managerial art to balance between participation and authoritarianism.
Furthermore, the negative effects can not be reduced by themselves, so participation is not enough in its own right. More attention should be cast on the setting of the correct target levels, more effective performance measurement, and authority to some extent.
The right target levels are helpful for the reduction or elimination of budget slack. The easily attainable targets will be excluded from the right level, and also the too difficult ones. However, how to make the right judgment of the appropriate level is still complicated.
Most of the performance measurement is related to the accomplishment of budget targets, which can cause lots of problems as mentioned previously. If people can find more effective measurements to evaluate performance to reduce the relationship of budget with performance, the budget slack can be reduced correspondingly.
The authority is for the effectiveness of decision-making process. The emphasis here is how much authority should be involved into the progress of budget setting. Too much or too little authority will not meet the expectation.
This article sought to improve the understanding of the role of participation in budget setting. Though budgetary participation seems appealing for its probable advantages, it can bear several problems.
The underlying issue is its ambiguous relationship with performance. People are easy to get the impression that they are positively related, however, the empirical evidences tell something differently. The linkage between participation and performance should depend on different circumstances and different intervening variables.
Even though not considering the equivocation of the relationship of budgetary participation and performance, participation still bear some problems, such as budget slack and the extent of participation. These negative effects can be reduced by involving other managerial methods.
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