Essay on Cost Accounting

1464 Words Jul 3rd, 2015 6 Pages
Cost & Management Accounting
Assignment # 1
Prepared by: ASAD AMIN Roll no: 11108124 Section: B Submitted to: Sir Hassan Jabbar

Explain the relative merits of the top-down and bottom-up approaches to budget setting?

Budgeting is a formal process in which a company's expenses and revenues are planned for the future. Top down and bottom up are two most common budgeting techniques. In the top-down approach, upper management prepares budgets with no input from
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The top-down approach is less time-intensive, as it includes only the input of key decision-makers.
Inaccurate Forecasting * Theoretically, department heads have a better understanding of the financial needs of their departments than upper management. Creating a budget without the input of key personnel from the rank and file can result in underfunding or overfunding of a department.
Potential for Underperformance * If a department feels it is being underfunded, it may underperform in retaliation. It may use its exclusion from the budgeting process as a way to justify why goals or objectives are not met by indicating it did not have the financial resources to meet unfunded directives. Top-down budgeting may also spur a department to use all of its financial allocation whether it really needs to or not, so it can avoid the risk of getting less money the following year.
Employee Morale * Managers and employees may be resentful that their input is not valued in the budgeting process. Directors and department heads who are at odds with upper management over financial issues can cause tension and performance issues in the workplace.
The relative merits of Bottom-Up Budgeting

Decentralized and Participative * Bottom-up budgeting is a participative approach to budget preparation that encourages input from organization-wide functional and

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