Budget Padding

Bart(1988) asserts that “manager’s pad their budgets out of fear that senior management will arbitrarily slash their submitted budgets and the manager’s own concerns about the uncertainties in the competitive environment”. Critically discuss the concept of budgeting in the current dynamic competitive environment.

Budgets are prepared by various businesses traditionally to provide an authority for managers to spend on behalf of the company or to provide a yardstick to compare current performance with previous year’s performance. Based on the outcome, managers can be monitored and at the same time the targets set for the managers will be used to motivate managers. In essence budgets according to Collier and Agyei- Ampomah (2006) should provide a control mechanism through feedback and feed forward loops.

Depending on the organisational structure of an organisation, there are different ways in which budgets are prepared. On the one end, there is the imposed style of budgeting which is defined by Scarlet (2007) as “an imposed or top down budget where budget allowances are set without permitting the ultimate budget holders to have the opportunity to participate in the budgeting process”. This has its many advantages such as it being less time consuming, ensuring that strategic plans for the organisation are being achieved, and also because senior management have a better insight as to available resources to the organisation, these resources are used judiciously.

By budgets being imposed, managers who implement the budgets see it as a punitive tool, managers become demotivated and creativity and initiative by managers will become hushed. Managers will find it difficult to accept the organisation’s goals because they have not being involved in its preparation.

The other end of the spectrum is the participative type of budgeting defined by Scarlet (2007) as “a process where all budget holders have the opportunity to participate in setting their own...