Approaches to designing a budget: Mandated approach to budget design, Participative approach, and the Blended approach. PDF

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Budget processes are crucial in the organization of a business. It is of paramount importance that a comprehensive budget should therefore include all the sections of the business....

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Learning Guide Unit 3 Discussion Assignment

Describe, in your own words, the following approaches to designing a budget: Mandated approach to budget design, Participative approach, and the Blended approach. What advantages or disadvantages do you believe each approach carries? Which approach do you think is the best? You are encouraged to research outside sources and, of course, cite them. Do not, however, quote sources word-for-word, but rather, respond to the Discussion Forum Question in your own words.

Budget processes are crucial in the organization of a business. It is of paramount importance that a comprehensive budget should therefore include all the sections of the business. As a result, other representatives are carried along and included in the all through the process. Moreover, in designing a budget, there are certain approaches which include (Walther and Skousen, 2010): 

Mandated Approach



Participative Approach



Blended Approach Mandated Approach

This is often referred to as the “top-down mandated approach”. In this type of approach to budgeting, the top-level (upper) management (upper-level Executives) call the shot by dictating how every process concerning the budget is prepared. Hence, the upper-level executives (President and CEO) cover expenditure levels, guidelines for compensation, sales goals etc. On the other end of the spectrum, the lower-level employees only contribute little

input into the organization’s overall settings (Walther and Skousen, 2010). This approach also has its advantages and disadvantages. Advantages i.

In the top-down approach, whenever the management takes into account complete control over budget apportionments, by ensuring that the company remains on firm financial track, it restructures the business accounting process (McQuerrey, n.d.).

ii.

The directives for the organization are set by the upper-level management who give indicators regarding the organization’s expectation towards the sales and production activity’s target that should be met (Walther and Skousen, 2010).

iii.

Communication with regards to the company’s budget from the upper-level management appears to be more effective in such a way that it gets employee to be on their feet and perform accordingly because they are receiving the message directly from the top (Walther and Skousen, 2010).

Disadvantages i.

In the top-down approach, the budget can be viewed by lower-level managers as a dictatorial standard and therefore causes acrimony (Walther and Skousen, 2010).

ii.

The lower-level employees may feel irrelevant in the organization based on the fact that their input towards designing the budget is being neglected and not counted on by the upper-level executive, which eventually make them lack job satisfaction and employee morale (McQuerrey, n.d.). Participative Approach

This is often referred to as the “bottom-up participative approach”. It is solely dependent on getting the lower-level employees involved in the budget process. The budget process with general budget guidelines can be instigated by the upper-level management but the

development of budget for the various units is usually driven by the bottom-up units. Afterwards, the overall plan is definitely received by the top executives and of course, the budget components is reviewed for consistency and coordination by the budget committee (Walther and Skousen, 2010). In addition, high-level strategies are often not considered by senior management in a participative approach, hence, it is the duty of the executives to equip the lower-level employees with all the guidelines they require to facilitate the overall direction of the organization linking it with their individual departments (Accounting tools, 2020). Advantages i.

The lower-level employees have a sense of employee morale and job satisfaction. The absolute fact that they can be relied on by the senior management concerning the design of the budget process builds in them a confidence of cohesiveness and teamwork, which is of paramount importance to the success of any thriving business (McQuerrey, n.d.).

ii.

This approach literally creates a budget that is more achievable in comparison to the budgets imposed by the upper-level management whereby there is no participation of the employees (Accounting tools, 2020).

Disadvantages i.

The bottom-up approach is expensive to develop and administer and also more time consuming (Walther and Skousen, 2010).

ii.

It takes a longer time to create a budget in this case because of the large number of employees involved in the process unlike tat of the Upper-level executives with only a few people (Accounting tools, 2020).

Blended Approach In this approach, information is basically passed in both ways. This budget process can be referred to as “top-down or bottom-up ”. There is usually a shared responsibility for the preparation of the budget. Interestingly, the majority of organizations use the blended approach in designing their budget (Walther and Skousen, 2010). 

Organizational Structure Considerations

In an organization, it is imperative that how information is passed and transferred from one unit to another should be known or rather observed by the managers at different levels. The top-down and bottom-up transfer of budget information within an organization could have a possibility of it losing its original content. In both ways, there could be a mismatch of clarity of information being passed across the senior management as well as the lower-level employees. 

Flattening the Organization Chart

This budget process provides an opportunity that would encourage constant monitoring of the entity’s organizational structure. In most cases, organizations put in so much effort to minimize the number of links in the chain of command by flattening the organizational chart. As a matter of fact, the reason behind this action is in order to allow the upper executives have a clear and direct access that has to do with important information that originates with employees in the fore-front (Walther and Skousen, 2010). 

Budget Estimation

In budget estimation, mistakes are unavoidable based on the fact that no can foresee the future. Moreover, budget estimate should be carried out with rapt attention and in a

meticulous manner. As a matter of fact, this is where previous evaluation information should be taken into account, whereby there must be a considerable level of evaluation of the change in economic conditions. Which approach do you think is the best? In my opinion, I think the mandated approach is the best and also based on the fact that I am used to that approach because in most organizations where I have worked, that is the approach that has been used. In this top-down approach, the senior management are the ones that come up with the budgeting process for the year. In this case, the previous year’s budget and financial statements are used as a yardstick to make apportionments to the various departments and units. I believe because the senior management are responsible for the complete growth of the company, they are in the right position to understand better the budget features and thereby assign resources that enhances the growth of the company. In addition, I strongly believe that the budgeting process by the senior executives is more efficient, less tasking and quicker because a single budget is being followed by the department rather than creating individual budgets whereby the various departments develop their individual budget that is combined afterwards (CFI, n.d.).

References Walther, L. M. & Skousen, C. J. (2010). Budgeting: Planning for success. Retrieved from https://my.uopeople.edu/pluginfile.php/844223/mod_page/content/7/BudgetingPlanningForS uccess.pdf McQuerrey, L. (n.d.). Top-down & bottom-up promotional budget approaches. Retrieved from https://smallbusiness.chron.com/topdown-bottomup-promotional-budget-approaches59307.html Accounting Tools. (2020). Participative budgeting. Retrieved from https://www.accountingtools.com/articles/what-is-participative-budgeting.html Corporate Finance Institute. (n.d.). Top-down budgeting. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/top-down-budgeting/...