Question

(1) Describe the top-down budget method. What are its advantages and disadvantages?
(2) Describe the bottom-up budget method. What are its advantages and disadvantages?
(3) Which budget method (top-down or bottom-up method) is more likely to result in budgetary slack? Why?

Answer 1

Top-Down Budgeting Process

Top-down budgeting refers to a budgeting method where senior management prepares a high-level budget for the company. The company’s senior management prepares the budget based on its objectives and then passes it on to the managers for implementation. Sometimes, the managers may put forward suggestions for the budget before the budget preparation, but whether their contribution to the budgeting process will be used or not is at the management’s discretion.

Advantages of Top-Down Budgeting

• Because senior management is concerned with the overall growth of the organization the budget demonstrates an overall corporate functional approach.
• Top-down budgeting saves time for lower management. Rather than spending time creating a budget from scratch, lower-level managers are given an already-formulated budget to implement. It saves both time and resources that the managers would’ve had to use to formulate the budget.
• Top-down budgeting creates one budget at a time, rather than allowing departments to develop their budgets and later combining them. As a result, the budgeting process will be less tedious, since senior management will formulate a single budget that the departments will follow.
• It allows management to allocate resources to departments with a view to propelling the growth of the company, starting with the most critical department.

Disadvantages of Top-Down Budgeting

• The level of motivation decreases since the managers who are required to implement the budget do not own the budget-making process. The managers do not take part in the preparation of the budget and may, therefore, lack incentive to ensure its success.
• Senior managers are not involved in the day-to-day operations of the company, and they may not have realistic expectations of the expenses related to each department.
• Lower-level managers may find it difficult to implement the budget because they are unaware of how the top management arrived at the set targets.

Bottom-Up Budgeting

Bottom-up budgeting starts at the department level and moves up to the top management. The departmental heads/managers prepare their budget based on present information and past experiences and present it to the senior management for approval. They take into account margin pressures and market conditions to make the budget more realistic and attainable. The budget presented to the top management contains an explanation of each item indicated in the budget.

Advantages of Bottom-Up Budgeting

• The level of motivation increases since the managers are required to implement the budget and are vested with the responsibility of the budget-making process.
• Since lower- level managers are involved in the day-to-day operations of the company, they have realistic expectations of the expenses related to each department.

Disadvantages of Bottom-Up Budgeting

• Bottom-up budgeting wastes time of lower management. Lower-level managers wastes their time formulating budget which otherwise have been used for productive purpose.
• Bottom-up budgeting involves formulating budget individually by lower managers which affects the working of the organization altogether.
• At times lower level managers focus on their department’s growth which may affect the objectives of the owners of the business.

Each approach has strengths and weaknesses, but in actual fact both works together. The top down approach using historical spend data is ideal to set the budget for particular projects. But the bottom up approach means you build the budget up from zero and places a focus on what needs to be done and for how much and not just what can be done for the budget.

Too often marketers and their agencies will use a top down approach alone because there are many objectives which are decided by the company top managers and while formulating budget they should be kept in mind. Therefore bottom-up method is more likely to result in budgetary slack because if all the lower managers would get busy in preparing the budget then how will the labors be managed in their absence, the bottom up approach has more slacking characteristics then doing something good for the company as a whole.