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ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting

Which budgeting style is most likely to improve managers' motivation and commitment to the budget, but may also lead to budgetary slack?

Participative budgeting. Involving managers in setting their targets increases ownership and motivation, but because they know their performance will be judged against the budget they may understate revenues or overstate costs, creating budgetary slack. Imposed budgets usually reduce commitment.

  1. AImposed budgeting set by senior management without consultation
  2. BParticipative budgeting with managers involved in setting targetsCorrect
  3. CZero-based budgeting performed by head office only
  4. DIncremental budgeting using last year's figures plus 3%

Explanation

Participative budgeting involves managers in setting their own targets, which increases ownership and commitment. However, managers may build in slack by understating revenue or overstating costs, since they know their performance is judged against the budget. Imposed budgets tend to reduce commitment.

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