Explain the advantages of management participation in budget setting and the potential problems that may...

A purposes of budgeting is to act as a control mechanism, with actual results being compared against budget.

Another purpose of a budget is to set targets to motivate managers and optimize their performance.

The participation of managers in the budget setting process has several advantages. Managers are more likely to be motivated to achieve the target if they have participated in setting process has several advantages. managers are more likely to be motivated to achieve the target if they have participated in setting the target.

Participation in budget setting can reduce the information asymmetry gap that can arise when targets are imposed by senior management. Imposed targets are likely to make managers feel demotivated and alienated and result in poor performance.

Participation in budget setting can cause problems; in particular, managers may attempt to negotiate budgets that they feel are easy to achieve which gives rise to “budget padding” or budgetary slack.

Managers will not ‘empire build’ because they don’t believe that the size of their budget reflects their importance within the organization.