Question

compare the top-down and bottom-up approach to budgeting

2. Compare perpetual, incremental and zero-based budgeting

3. Compare imposed and participative approaches to budgeting

Answer 1

Top-down budgeting can be seen as a process of budget making by the top management of any organization. Once the budget is decided by the top management, it is being handed over to the lower level managers or departments. This approach can be seen as a better method of budgeting as lower management can be involved in performing their normal operations rather than taking the pain of budget making. Thus lower management is able to save time for operational activities. But as this budget is prepared by those managers who are not involved in the operations of the organization, thus they may not have adequate information about the number of expenses needed by the departments and it will create a problem in future for the lower management.

Bottom-up budgeting is just opposite to the top-down budgeting. In this type of budgeting, the budget for the department is developed by the lower level of management and then it is forwarded to the top management for the approval. This budget can either be approved or sent back to the lower managers by the top management. This budgeting process is more practical as the lower management has the information about the required expenses but the top management can send it for review or reframing as there can be various other planning of the top management which may require allocation of funds.

The perpetual budget can be seen as a budget which has been extended continuously when the current reporting period is finished. This will indicate the existence of the budget for the next year or 12 months despite having the duration of budget less than or longer than the interval.

Incremental budgeting can be seen as a process of making budget in which some small changes are done in the existing budget in order to make the new budget. In this type of budget, only some incremental amounts are added in the already available budget.

Zero Based budgeting can be seen as a budgeting process in which all the expenses are justified for each new accounting period. In this budgeting, the process of making the budget starts from having a base of ZERO and then each department or function estimates the total costs and expenses required. Thus we can say that this is a budget which is prepared from scratches

Participative budgeting can be defined as a budgeting process in which all the managers who are associated or involved in any department of activity are free to provide their insight while preparing the budget. This can be seen as bottom-up budgeting approach as line managers provide their inputs o the top managers for budget making.

In case of the imposed budget, there is no involvement of lower managers in the budget-making process and the budget is made by the top managers and passed to the line managers for execution. This is a top-down budget approach.