Importance Of Participation In Budgeting

Budget participation is another factor that is important in evaluating and determining the firm’s performance. Sharing of information among organizational members is crucial in the budgeting process. Research has found that if the opinions of the employees are collected and reviewed in the budgeting process, then the firm will have a higher possibility of achieving the goals and targets compared to budgets which are set up by the directors. However, this is only considered effective if the employees value their membership in the committee and think of the targets of budgeting as a common desired goal. Hence, participation by individual members can improve group interaction.

Budgetary participation is expected to be a very important channel

It is regarded as a negotiation channel linking communication between superiors and subordinates in an organization. This includes downward communication from superiors to subordinates and upward communication from subordinates to superiors. Downward communication lets subordinates obtain extra information such as their responsibilities and expected performance from superiors through budgeting process, which improves the subordinates’ effectiveness. Upward communication means that subordinates communicate their information to their respective superiors, resulting in better decision-making and budget.

Moreover, budget participation of employees can help to improve the realisation of budget goals. Thus, a firm management team should encourage employee participation in the budgeting process, a process which will involve setting goals and targets that are achievable.

Budget

It is one of the major factors that will determine how the budgetary process is affecting the firm performance. Budget control happens when there is a difference between the actual amount incurred and the budget that was set up previously. This is known as a budget variance. There are two types of budget variance, which are favourable variances and unfavourable variances. For example, if actual revenue exceeds budgeted revenue, then it is a favourable variance. On the other hand if actual revenue is lower than budgeted revenue, then it is an unfavourable variance. Favourable budget variance is caused by effective and efficient cost management which results in greater net income. However, ineffective and inefficient cost management will results in unfavourable budget variances and thus lower the net income. The variance in budget is mainly caused by four factors. Firstly, budget variance can be resulted from inaccurate data. Besides, the changes in the costs of raw materials and production quantity can also cause budget variance. Moreover, random or unusual happenings can also give rise to variation. Over-efficient or under-efficient operations may also results in budget