June 20, 2011

Managers’ participation in setting budgetary outcomes

Budgets are commonly used in a decentralized organization to enable the firm come up with a better decision. As much as a strategic plan is vital in an organization, the motivation that a budget will have on the workers is the most important aspect here. When a budget is linked to the companies’ performance, then motivational tools need to be employed to encourage competition among the employees. Traditionally, budgets that were based on the compensation plans normally provided an economic incentive. This was to ensure that the subordinates misrepresented their production and they could build slack in the budgets. Slack was believed to give a biased budget and the profits of the organization were negatively affected.

The subordinate managers had more compensation and thus reduced the profit of the company. In order to mitigate the slack budget, there was a need for the researchers to introduce a compensation scheme called, “truth- inducing”. According to the empirical research, truth – inducing reduces productivity in an organization. Manager should participate and come up with a budget (Smith, Thorne, & Hilton, 2009). This process whereby managers participate in the formation of a budget is called a participatory budget. This is believed to be the best method of preparing a budget as it involves the managerial level. The advantage of this is that, the implementation of the budget is very easy as the managers are able to come up with a better decision. In some cases, the lower level managers are allowed to come up with a budget.

The top managerial level must however approve the budget made by the lower level manager to avoid budgetary slack. To fully eradicate on the budgetary slack, the top managers must be have technological information on how to make a budget. This is why it is important for the managers to pass through technical level before reaching the managerial level. Participatory budget is an ideal budget. However, most organizations tend to deviate from using this type of budget. The top management simply initiate through giving out guidelines. When the top management puts unrealistic targets there is a higher chance of increased slacks in the budget. This will lead to increased waste and the employee may not be able to reach the high targets and thus, their motivations will be killed instantly (Smith, Thorne, & Hilton, 2009). At the managerial level, there should be an expert in accounting who is able to direct the colleagues through the proposed budget. This will ensure the finance of the company is controlled and there is no unnecessarily waste.

Explain the meaning of Sustainability and why some managers wish to adopt these approaches using example

In a nut shell, sustainability can also be referred to as green building. Many educational institutions are maximizing on the green facilities and making them a great opportunity. The green building provides great numerous advantages to school and other learning institutions that use them. Apart from them being very cost effective, they are durable and they provide a better learning environment. The sustainable products always cost higher at the initial stage but in the long run, it is the most economical way of reducing on the maintenance costs. It is important for the concerned bodies to make maximum use of the available resources through recycling them where necessary (Smith, Thorne, & Hilton, 2009). This will ensure reduction in the cost of purchasing all the required facilities. In lighting for example in a learning institution, the facility must be able to use the natural light during the day and thus the facilities must be made to incorporate this.

While using a participatory budget, it is important for an organization to ensure that the budget has incorporated better facilities. This as much as it may look too high, it is better if good facilities are used to reduce on the maintenance fee. It is also important for a budget to be flexible so as to be able to incorporate future amendments and uncertainties. Most of the learning institutions use the recycling program. This is a good strategy but it is always necessary to reinforce the current concept.

A flexible budget gives budgeted data in various activity levels. While the managers might be in a dilemma of wanting to choose the budget that has the lowest cost, they must also put sustainability into considerations. As most people say, cheap is expensive, it is vital for the managers to make a right choice while selecting the right budget. A budget may seem to be cheap but the quality of the equipments may also be cheap and thus compromising with the sustainability (Smith, Thorne, & Hilton, 2009). In accounting, maintenance fee can even be more expensive than the initial price of a commodity. It is therefore a rational decision if sustainability is put into the equation. Investing on the durable facilities will ensure control of the financial flow in an organization. A budget report is equally always important to emphasize on how the finance will be allocated. As much as the report may show the variances of the budget, it does not really give the reason for the variance. This however allows the managers to make a follow up on the finance performance.


Smith, K. Thorne, H. & Hilton, R. W. (2009). Management Accounting: Information for

Managing and Creating Value (5th Ed.). Australia: McGraw-Hill.