Top down v/s Bottom up budgeting

Top down v/s Bottom up budgeting

1. Top down Budgeting

   • 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.
     • 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

   • 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.
   • Advantages
     • Increased motivation due to ownership of the budget
     • Should contain better information since employees most familiar with the department set the budget thus the budget will be more technical and accurate
     • Increases manager's understanding and commitment.The line managers can improve thier budgeting and visionary skills
     • Better communication and coordination between departments thus it will lead to a sense of teamwork
     • saves time of high level executives so that Senior managers can concentrate on strategy and other productive functions
   • Disadvantages
     • Senior managers may resent loss of control
     • Dysfunctional behaviour: budgets may not be in line with corporate objectives as managers lack a strategic perspective and will focus on divisional performance
     • May lead Bad decisions from inexperienced managers
       • 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.
     • Budget preparation is slow and disputes can arise
       • In times of crisis there may be insufficient time to set a participative budget and targets may have to be imposed to ensure survival.
       • Pseudoparticipation, where senior managers seek the opinions of the ultimate budget holders but do not act on these views, may lead to demotivation.
     • high possibility of Budgetary slack: managers set targets that are too easy to achieve.