Question

What are some potential problems with the top-down and bottom-up budgeting processes? What are some ways of dealing with these potential problems? In preparing a budget, what indirect costs should be considered? Please use a reference.

Answer 1

Top-Down - is based on estimating the cost of higher-level tasks first and using these estimates to constrain the estimates for lower level tasks. Experience and judgment of those involved in producing the overall budget estimate is a crucial factor for successfully implementing this method. Disadvantages -

• Translating long-range budgets into short-range budgets can be difficult
• Top management's limited knowledge of specifics of project tasks and activities may lead to underestimation of costs
• It may lead to competition for funds among lower-level managers trying to secure adequate funding for their operations
• Subordinate managers often feel that they have insufficient budget allocations to achieve goals.
• This budgeting process is a zero sum game -- one person's or area's gain is another's loss - all cannot win.

Bottom-Up - begins with identifying all constituent tasks that are involved in implementing a project and working out the resources and funding required by each. It provides the opportunity to create organization-level budgets by rolling up project budgets and creates centralized project-level budgets from their sub-project budgets. Disadvantages -->>

• Top management has limited influence over the budgeting process
• Individuals tend to overstate their resource needs because they suspect that higher management will probably cut all budgets by the same percentage
• A significant portion of budget building is in the hands of the junior personnel in the organization
• Persuasive managers sometimes get a disproportionate share of resources
• Sometimes critical activities are missed and left without being estimated / budgeted.

Best way of budgeting and a problem solving approach could be a flexible mixture between top-down budgeting and bottomup process, for obtaining optimum results for organizations.

Indirect costs / Overheads -- are project-related expenses that cannot be identified readily and specifically to a particular sponsored project, e.g., the costs of heat and air conditioning, electricity, building maintenance, security, libraries, administrative services, desktops, cell phones etc should be considered while budget preparation.