Question

As a manager in a business, you have to make many decisions on how budgeting takes place. If you had a choice in a company where you are a manager, would you use top down budgeting or bottom up budgeting?

Answer 1

Under top down budgeting, the senior management is directly involved in the process of preparation and development of a high level budgets for the company as a whole. After the creation of such budgets, allocation of appropriate amounts is done among various individual departments, which then construct their own respective budgets within the limits of the created budgets at the executive level. This results in considerable savings in time for those who are involved more in day to day operations instead of overall organizational strategy. It might also result in some issues for departments relating to those resources which do not find their place in the top down budgets due to lack of awareness of some particular expenses.

On the other hand, the process of bottum up budgeting begins at the level of individual departments, where budgets are created by the managers and forwarded to the higher authorities for their approval. Such budget is either approved, revised with some modifications and on the basis of different departmental budgets, a master budget is prepared. It leads to more familiarity and understanding among the employees about the budgets, as they directly participate in budgeting process, however in some case, bottum up budgeting leads to budgets which are not in conformity with the overall objectives of the entity due to excessive emphasis on any specific department in place of the entity as a whole.

Therefore, the decision to choose between top down and bottum up budgeting depends upon the detailed and critical analysis of the above discussed considerations, because both have their merits as well as demerits. After such analysis, the most reasonable and desirable decision is arrived at by the managers.