Question

Compare and contrast top-down and bottom-up project budgeting. What are the advantages and disadvantages of each?

Answer 1

Top down is the process in which you set up the total or top budget and then break it down into component parts within that budget. Here you start from the top and drill down to the bottom. Whereas in the Bottom up process you start with a list of plan or schedule of things you want to do and get sum costs of all the planned things to estimate the total cost of the budget.

When the responsibility centers within the organization proposed their own budgets then sum up these centers budgets to get the total budget. Thus in such organizations with responsibility centers the bottom is process is more valid with each center being the starting point for the process which facilitates good planning and help to make revenue and expense budgets more valid evaluation tools. While in the Top down process the senior management sets the total budget at the top level which then drills down to the centers.

Bottom up budgeting does not promote cost control by senior management and can lead to an organization failure to live within its overall means. Thus expense budgets must ultimately flow down from senior management who better knows what the capability and ability of organization in terms of budget. Whereas Top down budgeting in which expense budgets ultimately flow down from senior management does promote cost control by senior management and shall not lead to an organization failure to live within its overall means. The more strongly the management influences and controls the budget process the more the organization has followed the Top down budgeting process.

In Top down budgeting while its upto total discretion of the senior management to decide what should be the budget for the various centers within the organization there is a possibility of bias towards one center than the other this can lead to bad budget planning. While in the Bottom up budgeting there is budget demand from each center and it’s allocated as per demand which lead to effective budget planning.

One of the primary disadvantages of Bottom up budgeting is that it can lead the project managers or those in charge to ask for more funding than actually is required; this can lead to a waste of money and distrust between the various managers. Whereas in top down budgeting the money provided to the managers is what is needed which shall lead to a minimum waste for money.

Bottom up budgeting	Top down budgeting
Increased motivation due to ownership of budget	Seniors managers may resent loss of control
Increase manager understanding and commitment	Bad decisions from inexperienced managers
Better communication b/w departments	Budget preparation is slow and disputes can arise
Seniors managers can concentrate on strategy	Managers set targets that are too easy to achieve.