Question

The two widely used practices in preparing budgets are ‘top down’ budgeting and ‘bottom up’ budgeting. Identify and explain the practice adopted by the organisation discussed in your selected journal article and further explain the behavioural implications of adopted practice. (5 mark

Answer 1

Top-down budgeting is a budgeting method in which senior management develops a high-level budget for the company. Once the top-level numbers are created, amounts are allocated to individual functions or departments that must create a detailed budget with their allocation.

Suppose a person is a manager in a firm. He or she will go for top down budgeting like the process detailed below:

Senior management meets and determines high-level targets for the company for sales, expenses, and profits. You would not be included in this meeting; instead, only senior management would gather in a room and come up with the overall objectives for the year.

Then, the finance department takes the approved totals and allocates them out by department. They will likely use percentages from prior years to do this split - so if your department was responsible for 20% of the operating expenses last year, you will likely see a budget target of 20% of the total operating expenses approved for your department in the high-level budget.

Next, each department manager is asked to take his or her allocation and develop a detailed budget to match it. This will be your job - taking the total revenue and cost figures you've received and developing a detailed budget showing how your department will generate the revenues assigned and what you'll spend the cost dollars on to generate those revenues. This detailed budget will include specifics like the quantity of different products sold, the number and type of staff required, and detailed expenses by category, such as office supplies, equipment, and payroll.

All of the detailed budgets are then submitted back to the finance department, which consolidates them to make sure the overall objectives have been met. You may receive your budget back for revision; for example, if another department manager made a good case for her cost allocation being insufficient for her to meet revenue goals, that department's allocation may be adjusted with a corresponding decrease in your allowed expenses.

Advantages: With top-down budgeting, only the executive team is involved and thus lower management does not have to take time to prepare the budget. This can represent significant time-savings for those who are more involved in the day-to-day rather than the overall strategy for the organization.

Disadvantages: With the top-down approach, those creating the budget may not be involved with the day-to-day and as a result may not be aware of some of the specific expenses required. This may result in problems for departments looking for resources that just don’t fit into the top-down budget.

Bottom-up budgeting starts with the pieces to arrive at a whole number.Bottom-up budgeting is a bit different than the traditional budgeting model with which you might be more familiar. Bottom-up budgeting, sometimes referred to as participative budgeting because of the participation required at all levels, starts with a list of things individual departments want or plan to do, such as projects; assigns a cost to each project; and then totals up all the projects in each department to arrive at an overall budget number.A more typical approach, known as top-down budgeting, is when you develop a total budget across the organization and then break it down into various pieces and departments.

To implement a budget from the bottom up, one needs to understand the methodology behind the process.

1. Identify the individual components of your business and any projects or goals you plan to complete in the coming year. For example, marketing might choose to launch a new website. Your product development team may be coming out with a new product. Look at each of these projects and establish an estimated cost for each. Other individual components of a departmental budget might include staff salaries and expenses for new equipment or conference and event fees.

• Once you've looked at each department and its planned projects for the year, create totals from all of a department's projects to arrive at an estimated overall budget for that department. For example, your sales department has project goals amounting $10,000, $25,000, and $40,000 for the coming year. Overall, your sales department's budget would be $75,000. This is for one department, but this process must be performed for each department with the help of departmental managers who can identify plans and opportunities and help assess costs associated with each. Advantages of Bottom-up Budgeting
• Better accuracy-Bottom-up budgeting calculates budget estimates from the lowest level, which helps boost the accuracy and accountability of the budget. The process involves all the individuals in each department. The estimates given will be as close as possible to reality since the employees are better placed to understand the costs, resources, expenses, and requirements of their respective departments. When the estimates for all departments are added up to get the overall budget, the senior management should know what to expect in the coming year.

• Employee motivation - When employees are involved in the budget-making process, they are motivated to work hard to achieve the organization’s goals. The employees in each department of the organization are involved in formulating the budget estimates, giving them a sense of ownership in the budget-making process.