Proper handling of human relations is essential to the establishment of an effective budgeting system. There is a natural tendency for people to be uncomfortable with budgets. Describe how participative budgeting helps create a healthy atmosphere surrounding the budgeting process.

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Answer 1

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Participative budgeting encourages participation by subordinates as well as upper management in the budget process. Information flows in both bottom-to-top and top-to-bottom directions during budget preparations. Since subordinates are directly responsible for the accomplishment of the budget objectives, they are able to make more realistic estimates of what can be attained. Accordingly, subordinates begin the process by developing the initial budget estimates. Their involvement improves the likelihood that they will take ownership in the objectives that are eventually established. Upper management participates in the process by assuring that the objectives developed by the subordinates are consistent with the overall objectives of the company and that they represent targets that are challenging but attainable. If handled properly, budgets can help motivate employees to achieve superior performance in spite of the natural human fears that are often present.