Question

List and discuss the pros and cons of using top-down budgeting? Why type of companies or industries would benefit the most from this strategy?   

Answer 1

Solution:

Top down budgeting Is one of the important method of preparing a budget for an organisation.Here the senior management prepares the budget on the basis of the aim of the organisation.The top management allocates the amounts for the separate departments.The head of the individual department may give suggestions to the top management before the budget preparation.But the power to make decisions is vested with the top management only.Top management uses the past records and current scenario for this preparation.

Merits:

1)Helps in overall growth of the company

2)It ensures well defined authority and responsibilities

3)It is one of the fastest way of preparing budget,It helps in interdepartmental issues.

4)It helps to save the time and efforts of the departmental managers

5)Here the company prepares only one budget instead of individual departments preparation

Demerits:

1)Departmental managers are not included in the decision making ,It will demotivate them.

2)Top level managers are not aware about the day to day operations,It will leads to the establishment of unrealistic targets.

3)This types of budget often leads to over or under allocation of resources.

Generally, Manufacturing industries are making benefits from this strategy.Manufacturing is the process of convering raw materials into finished goods. From the point of origin to the point of destination, A manufacturing industry demands various departments for it’s smooth functioning.There for top down budgeting will play a dominant role in manufacturing industries.