Question

Budget Development Methods--Provide an evaluation of the various types of budgeting approaches, such as top-down, cost aggregation, time-phased, and analogous budgeting. Use the text to understand what they are and how they might be used depending on the type of project and organizational structure. Are there pros and cons to each? This is a two part discussion.

Answer 1

Various budget development methods:

• Zero based budgeting: this is a budget that is formulated from the base instead of considering previous year budget as baseline. This is used mainly by government agencies & nonprofit organizations. Managers must justify every expense in zero based budgets. The main advantage of zero based budgeting is that it would reduce the cost because no consideration is given to previous year budget or activities. The disadvantage here is that documentation is considered to be very extensive because every function is analyzed & assigned a cost.
• Top down budgeting: this budget starts from the top level. The upper level management sets the guidelines & directions to lower level management on how to make budget calculations. This method gives lower management little input & the upper management must have the required experience to come up with the budget. The advantage of this method is that this method follows a structured process & promotes a certain organizational culture. The main disadvantage is that lower level employees feel that they are being simply dominated by the top management & their input hasn’t been valued.
• Bottom up budgeting: this is the opposite of top down where the inputs of lower level employees are considered. The guidelines and processes for the budget are still developed by upper-level management, but lower-level management employees determine the budgets for their individual departments. After they construct the budgets, they send the budgets to upper-level management for review and approval. If upper-level management finds problems with the budget, the upper-level managers usually send the budget back for revision until a final budget is reached. The advantage is that it boosts the employees’ morale because they feel an important responsibility been given. Disadvantage is that it is time consuming because of back & forth process.
• Activity based budgeting: here the volume of the activity is considered in setting the budget. Companies use these kinds of budgets to control their costs. The main advantage of this budget is that it can increase productivity & improve business practices. Disadvantage is that at times employees may feel that their productivity has been viewed negatively by the managers.