Top down v/s Bottom up budgeting

Shahid Musthafa
Mind Map by Shahid Musthafa, updated more than 1 year ago
Shahid Musthafa
Created by Shahid Musthafa over 6 years ago
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Master ACCA F5: Performance Management (C:Budgeting) Mind Map on Top down v/s Bottom up budgeting, created by Shahid Musthafa on 09/18/2013.

Resource summary

Top down v/s Bottom up budgeting
1 Top down Budgeting
1.1 A budget planning strategy where cost estimates are generated by working from the highest level downwards. In top-down budgeting, a cost is typically put on each unit of raw materials, services or labor required for the project, and the estimated number of units is then converted into a monetary sum to produce the overall cost estimate to be used by the business. Opposite of bottom-up budgeting.
1.1.1 A top down budget is a budget that is set without allowing the ultimate budget holder to have the opportunity to participate in the budgeting process.
2 Bottom up budgeting / Participative
2.1 A bottom up budget is a system of budgeting in which budget holders have the opportunity to participate in setting their own budgets. Also called participative budgeting.
2.2 Advantages
2.2.1 Increased motivation due to ownership of the budget
2.2.2 Should contain better information since employees most familiar with the department set the budget thus the budget will be more technical and accurate
2.2.3 Increases manager's understanding and commitment.The line managers can improve thier budgeting and visionary skills
2.2.4 Better communication and coordination between departments thus it will lead to a sense of teamwork
2.2.5 saves time of high level executives so that Senior managers can concentrate on strategy and other productive functions
2.3 Disadvantages
2.3.1 Senior managers may resent loss of control
2.3.2 Dysfunctional behaviour: budgets may not be in line with corporate objectives as managers lack a strategic perspective and will focus on divisional performance
2.3.3 May lead Bad decisions from inexperienced managers
2.3.3.1 Operational managers may not have the knowledge and experience to set a budget. For example, in a small business only the owner may be involved in all aspects of the business and may therefore set the budget.
2.3.4 Budget preparation is slow and disputes can arise
2.3.4.1 In times of crisis there may be insufficient time to set a participative budget and targets may have to be imposed to ensure survival.
2.3.4.2 Pseudoparticipation, where senior managers seek the opinions of the ultimate budget holders but do not act on these views, may lead to demotivation.
2.3.5 high possibility of Budgetary slack: managers set targets that are too easy to achieve.
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