Question

So the accountant's role on the budget committee should be consultative. The accountant should not be providing the numbers in the budget. The information for the budget "targets" should come from "users" of the budget because they know their individual areas better than anybody else! This is especially important in large entities.

By the way, accountants are no longer considered bean-counters, reporting only historical information. They are now problem-solvers...they play an important role in helping managers understand the past trends and make projections for the future, or help them make decisions in various business situations, as you will see in this chapter as well as future topics.

In a small sole proprietorship type entity, the owner himself/herself may prepare the budget with or without the help of the accountant, if there is one. Since the volume of operations is relatively smaller, you may not need a lot of manpower to prepare the budget.

Now, continuing with the discussion of the budgeting process....what do you think about the two broad approaches to budgeting, namely, participatory (bottom-up) vs. top-imposed (top-down)? What do these terms mean? What are some pros and cons of each approach? Which approach is followed in the place where you work?

Answer 1

Solution:

(1) The top-down approach to budgeting?

Solution: The Top-down approach to budgeting states that flow of direction and designing of the budget will flow from top to bottom. For an example, The Direction and designing of a budget will start from Cheif financial officer, accounting executives, accounting managers, general managers of different departments and finally clerks for execution purpose etc.  

Merits of the top-down approach:-

(a) The accuracy can be high due to expertise and technical estimates.

(b) Control will reside with the top authorities.

(c) Good decisions from experienced and expert people at the top.

Demerits of the top-down approach:-

(a) Top managements may not get more time to frame other strategies.

(b) At the lower level, people know the ground realities and needs of the department.

(c) Demotivation at a lower level due to less participation.

(2) The Bottom-up approach to budgeting?

Solution: The bottom-up approach to budgeting states that flow of direction and designing of the budget will flow from bottom to top. For an example, The Direction and designing of a budget will start from the department users who are more familiar with the budget of their concerned department rather top guns of the organization.

Merits of the bottom-up approach

(a) More accuracy due to the fact that lower level employees know the real numbers due to more familiarity with the use of budgets and needs of the department.

(b) Great sense of motivation and belongingness at a lower level.

(c) Top management can divert their energies towards other strategies.

Demerits of the bottom-up approach

(a) Inexperience may lead to poor planning and designing of budgets.

(b) The problem of budgetary slack i.e. setting estimates which are below average and easy to achieve.

(c) Problems like subjectivity, biasedness and unprofessionalism while designing budgets.

(3) Which approach is followed in the place where you work?

Solution: In a smaller organization, bottom-up approach is appropriate due to fewer resources and fewer resources requires lesser planning and controlling ( Example: Sole trade Business ) but in case of large nature of business like (firms and companies), the top-down approach is more relevant.

I am working in a University which is spread around 75 hectares area. While the budgeting of new academic buildings and hostel buildings, the top-down approach is used because it involves huge physical and monetary resources and effective utilization is not possible without the expertise.