Question

Describe, in your own words, the following approaches to designing a budget: Mandated approach to budget design, Participative approach, and the Blended approach. What advantages or disadvantages do you believe each approach carries? Which approach do you think is the best?

Answer 1

Mandated approach- In this approach, management sets the budget for the upcoming period and communicate it to the employee to fulfill.

Advantages

1. Faster process

2. Financial control

3. Accountability of staff

Disadvantage

1. Inaccurate forecasting resulting in inability of staff to achieve it.

2. Potential for underperformance

Participative approach- In this approach, inputs are given by all the functions. These inputs are consolidated for preparing budget for the company.

Advantage

1. Accurate forecasting as it is prepared by ground level staff.

2. People relate to budget and try to execute it.

Disadvantage

1. Staff tend to report nos basis conservative estimates thinking that higher targets will be difficult to achieve.

Conclusion

It should be mixed between these two approaches. Management should prepare the budget after considering all the inputs received from the functions to ensure that all the elements are considered while preparing the budget. This increases employee morale and motivates them to achieve the set target.