Question

Case 9-46 Participative Budgeting (LO 9-20, 9-3Q, 9-9@) Patricia Eklund, controller in the division of social services for the state, recognizes the importance of the budgetary process for planning, control, and motivational purposes. She believes that a properly implemented participative budgetary process for planning purposes and an evaluation procedure will motivate the managers to improve productivity within their particular departments. Based upon this philosophy, Eklund has implemented the following budgetary procedures. • An appropriation target figure is given to each department manager. This amount is the maximum funding that each department can expect to receive in the next year. • Department managers develop their individual budgets within the following spending constraints as directed by the controller's staff. • Expenditure requests cannot exceed the appropriation target. Page 413 • All fixed expenditures should be included in the budget. Fixed expenditures would include such items as contracts and salaries at current levels. o All government projects directed by higher authority should be included in the budget in their entirety. The controller's staff consolidates the budget requests from the various departments into a master budget submission for the entire division. Upon final budget approval by the legislature, the controller's staff allocates the appropriation to the various departments on instructions from the division manager. However, a specified percentage of each department's appropriation is held back in anticipation of potential budget cuts and special funding needs. The amount and use of this contingency fund is left to the discretion of the division manager. • Each department is allowed to adjust its budget when necessary to operate within the reduced appropriation level. However, as stated in the original directive, specific projects authorized by higher authority must remain intact.

Answer 1

Q - 1

Operational and behavioral benefits of a participative budgetary process

1. Targets set after discussion between and agreement of all parties involved
2. Done jointly between a superior and subordinates ; highest level of buy ins
3. Based on inputs, information, expertise and experiences provided by subordinates and local operations teams; informed decision making
4. Expertise in lieu of control
5. Likely to be realistic, achievable in normal course; ambitious but attainable; may have slack
6. Highly motivated employees
7. High level of ownership and buy in
8. Highly recommended for stable and mature companies where success is not dependent upon an individual or a group of individual but rather a team

Q - 2

Deficiencies:	Recommendation for correction
Arbitrary revision of approved budget is allowed, such an arbitrary revision option removes the seriousness of the budgeting process	Revision should be allowed only if it's backed by strong, sound reasons
Constraints have been put on budget of the fixed costs as well	Fixed costs are usually not controllable, hence they should be moved out of the budgeting process
Can be a long drawn processes; may require multiple rounds of discussion	At an appropriate point in time, Patricia has to intervene and cut the process short. She will have to close the process and publish the budget.
A %age of budget is held back for discretionary use.	This is unfair. If a budget has been prepared under participative process, then there is no room for discretion.

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