## **Learning Outcomes**

After reading this article, you will be able to explain the main types of budget approaches, distinguish between top-down and participative budgeting, and describe their impact on manager motivation and behaviour. You will be able to discuss budgetary slack—what it is, how it arises, and the behavioural factors that encourage or reduce its creation. You should also be able to evaluate the pros and cons of participation and make recommendations in scenario-based questions.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand both the technical aspects of budgeting and the behavioural effects that budgeting has on individuals and organisations. This article focuses on the following syllabus areas:

- Explain alternative budgeting models, including top-down and participative approaches
- Evaluate the impact of different budget-setting styles on motivation and performance
- Describe the concept of budgetary slack and how it can arise in practice
- Assess the behavioural implications of participation, motivation, and slack in organisational settings

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is a key advantage of participative (bottom-up) budgeting?
   a) Stronger central control
   b) Reduces manager motivation
   c) Greater sense of ownership by managers
   d) Faster budget-setting process

2. What is budgetary slack?
   a) A flexible budget
   b) Deliberate understatement of revenue or overstatement of expenses
   c) An unexpected surplus
   d) Agile project funding

3. True or false? Top-down (imposed) budgets reduce the risk of budgetary slack but may harm motivation.

4. Name two behavioural risks when managers are only rewarded for meeting easily achievable (slack) targets.

5. Give two methods by which organisations can reduce budgetary slack.

## **Introduction**

Budgeting remains a fundamental tool for organisational planning and control. However, the way in which budgets are set and the involvement of managers in the process can have significant behavioural impacts—both positive and negative. This article explains the main approaches to budget setting, focusing on participation, manager motivation, and the risk of managers introducing budgetary slack.

You will be introduced to the concepts of top-down (imposed) and bottom-up (participative) budgeting, learn how participation can affect attitudes and performance, and understand why budgetary slack frequently arises. Throughout, you will apply these ideas to business scenarios, as expected in ACCA APM exam questions.

> **Key Term: participative budgeting**
> A budget-setting approach in which managers responsible for budget centres are actively involved in preparing their own budgets, rather than having all targets imposed by higher management.
>
> **Key Term: budgetary slack**
> The deliberate overstatement of costs or understatement of revenues in a budget, intended to make targets easier to achieve.

## **Budget Approaches: Top-Down and Bottom-Up**

Organisations can set budgets in a variety of ways. The most common methods are top-down (imposed) budgeting and bottom-up (participative) budgeting. The choice of approach has direct implications for managerial behaviour and organisational performance.

### Top-Down (Imposed) Budgeting

In a top-down system, senior management establishes all or most of the budget with little input from operational managers. Budgets are then communicated down the organisational hierarchy.

Advantages:

- Fast and straightforward
- Consistent with strong central control
- Reduces risk of dysfunctional behaviour by inexperienced managers

Disadvantages:

- May overlook local conditions or operational realities
- Can reduce manager motivation, commitment, and sense of ownership
- Risk of managers feeling targets are unfair or unachievable

### Participative (Bottom-Up) Budgeting

Under a participative approach, budget holders at all levels are involved in setting their own or their department's budgets. These are then consolidated upwards.

Advantages:

- Encourages greater acceptance and 'ownership' of targets
- Incorporates detailed, local knowledge allowing more realistic budgets
- Can improve motivation and job satisfaction

Disadvantages:

- More time-consuming and complex
- Senior management may lose some control over targets
- Can increase risk of budgetary slack

> **Key Term: motivation**
> The internal and external factors that stimulate managers and staff to pursue goals, such as achieving or exceeding budget targets.
>
> **Key Term: responsibility accounting**
> An organisational structure where managers are held accountable for financial outcomes in areas under their control.

## **Behavioural Impacts and Motivation**

The way budgets are set greatly influences how people behave. Participation generally increases motivation, because managers:

- Feel their views are valued
- Accept targets as fair and achievable
- Feel empowered to manage resources

However, motivation can be affected negatively if:

- Budgets are unrealistic or imposed without consultation
- Rewards are not linked to genuine performance improvement
- Targets are set so low that they do not challenge staff

### **Worked Example 1.1**

A manufacturing company uses strict top-down budgeting. Operational managers are not consulted and find yearly targets difficult to achieve. Morale is low, and managers frequently complain that targets do not reflect actual business conditions.

**Question:** What behavioural problems might arise in this situation?

> **Answer:**
> Managers may feel disengaged and demotivated, leading to less effort, apathy, or even passive resistance to plans. They may attribute underperformance solely to 'unrealistic' targets and not take ownership of results.

## **Budgetary Slack: What and Why?**

Budgetary slack is an important concept in behavioural budgeting. It occurs when managers intentionally build 'cushion' into budgets to make targets easier to achieve, thus protecting themselves and increasing the likelihood of achieving bonuses.

Typical ways slack is introduced:

- Underestimating potential sales revenue
- Overestimating likely costs or resource requirements

Why does slack occur?

- Uncertainty about future performance
- Managers are rewarded for meeting (not exceeding) targets
- Fear that achieving higher results will mean an increased target next year

> **Key Term: budgetary slack**
> The deliberate inclusion of extra allowances or 'padding' in budgets by managers to improve the chance of meeting targets.

### Consequences of Slack

Budgetary slack makes performance evaluation less meaningful:

- True efficiency and effectiveness are hidden
- Organisational resources may be wasted (e.g., unnecessary spending to 'use up' budget)
- Short-term focus is favoured over genuine improvement or innovation

### **Worked Example 1.2**

A cost centre manager is asked to propose a departmental budget. She estimates costs will rise 10% next year, even though she expects only a 5% increase, in order to create a buffer. Later, she easily hits her target and qualifies for a performance bonus.

**Question:** What has happened, and what is the likely effect on performance?

> **Answer:**
> The manager has introduced budgetary slack. While she secures her bonus, resources may be wasted as her team is not incentivized to improve efficiency. The company may make poor allocation decisions, and the value of performance measurement is weakened.

## **Reducing Budgetary Slack**

Organisations can take steps to minimise slack and encourage fair and challenging targets:

- Use historical data combined with external benchmarks, not just manager input
- Involve both top-down and bottom-up processes (a mixed approach)
- Reward managers for achieving challenging, not just easily attainable, targets
- Regularly review and compare budgeted to actual results, investigating significant variances
- Encourage organisational culture that values transparency and continuous improvement

### **Exam Warning**

> In APM scenarios, always consider whether managers might have incentives to introduce slack. If bonus schemes or weak reviews encourage this, recommend controls to align budgets with organisational objectives and reduce padding.

### **Revision Tip**

> When answering ACCA questions, explicitly link budgeting style to motivational outcomes and the risks of slack. Use specific evidence from the scenario—are managers heavily involved? Is there pressure to "play safe"? Make clear recommendations.

## **Summary**

Budget approaches have significant behavioural impacts. Top-down budgeting offers control and reduces slack but can harm motivation. Participative budgeting increases ownership and motivation but is vulnerable to slack, especially if performance evaluation systems are poorly designed. Budgetary slack undermines the purpose of budgets, conceals true performance, and can lead to wasted resources. The best systems often combine both approaches, fostering participation while maintaining appropriate oversight and clear links to organisational objectives.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Distinguish between top-down (imposed) and participative (bottom-up) budgeting
- Explain the behavioural effects of participation on manager motivation and performance
- Define budgetary slack and describe why it occurs in participative budgeting
- Identify consequences of slack and how it can harm organisational performance
- Recommend methods to limit budgetary slack and improve budgeting effectiveness

## **Key Terms and Concepts**

- participative budgeting
- budgetary slack
- motivation
- responsibility accounting

Budget approaches and behavioural impacts - Participation motivation and budgetary slack