## **Learning Outcomes**

After reading this article, you will be able to distinguish top-down and bottom-up (participative) budgeting approaches, explain how each method affects motivation, ownership, and behavioural outcomes, identify advantages, disadvantages and potential risks, and apply the concepts to typical ACCA exam scenarios. You will also understand how to relate these approaches to budget bias and the overall effectiveness of a budgetary control system.

## **ACCA Management Accounting (MA) Syllabus**

For ACCA Management Accounting (MA), you are expected to recognise, compare and critically discuss the impact of different approaches to budgeting and their behavioural consequences. This includes understanding the following syllabus points relevant to this topic:

- Describe the main objectives and principles of budgeting.
- Explain the budgetary control process and its importance for planning and control.
- Identify and explain the features of imposed (top-down) and participative (bottom-up) budgeting.
- Discuss factors influencing motivation and behaviour in budgetary control systems.
- Discuss the risk of budgetary bias and how participation affects it.
- Evaluate the advantages and disadvantages of different budget-setting approaches.
- Recognise potential issues in managerial motivation and responsibility.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which approach to budgeting gives lower-level managers the greatest influence over setting their own targets?
   a) Top-down budgeting  
   b) Bottom-up budgeting  
   c) Imposed budgeting  
   d) Zero-based budgeting

2. Which of the following is a primary risk of the participative (bottom-up) budgeting process?
   a) Lack of motivation  
   b) Budgetary bias  
   c) Slow decision-making  
   d) Insufficient control by senior management

3. True or false? Top-down (imposed) budgets are always more motivating than bottom-up budgets.

4. Briefly state two behavioural problems that can arise if managers do not feel ownership over their budget.

## **Introduction**

Budgetary control is a critical management process for planning, co-ordination and performance evaluation. The way budgets are set can have a significant effect on manager motivation and behaviour. In practice, organisations commonly use either a **top-down (imposed)** approach, where senior management sets budgets with little lower-level input, or a **bottom-up (participative)** approach, which encourages wider input from those responsible for achieving targets.

Understanding the strengths and weaknesses of each approach is essential for effective budgetary control and informs how budgets drive (or hinder) organisational performance.

> **Key Term: budgetary control**
> The process of planning, monitoring and evaluating performance by comparing actual results against budgeted expectations, enabling management to take corrective action as needed.

## **TOP-DOWN (IMPOSED) BUDGETING**

Top-down budgeting, sometimes called **imposed budgeting**, places primary responsibility on senior management to set organisational goals and translate these into department and functional budgets. Lower-level managers have limited involvement beyond receiving and implementing the budget.

> **Key Term: imposed (top-down) budgeting**
> A budgeting method where senior management sets targets and allocates resources with little or no input from subordinate managers.

### Features

- Budgets are drafted by upper management.
- Departmental managers are instructed on targets and constraints.
- Implementation is swift, as consensus is not required.
- Control is centralised; accountability is clear.
- Assumptions are typically top-level and strategic.

### Advantages

- Speed: Budgets can be prepared and rolled out quickly.
- Strategic alignment: Ensures company-wide objectives and policies are consistently reflected.
- Useful when lower-level managers lack experience or understanding into overall organisational priorities.
- Good for situations requiring urgent action or where operational certainty is high.

### Disadvantages

- Reduced motivation: Managers may view the budget as externally imposed and lack ownership.
- Target realism: Senior managers may set unachievable or arbitrary budgetary targets due to lack of operational detail.
- Poor communication: Ideas and knowledge from operational staff are not incorporated.
- High risk of resistance, non-compliance, or “gaming” the budget.

### Behavioural Implications

- May cause managers to feel disengaged or avoid responsibility for results.
- Lower participation risks lower commitment to achieving targets.
- Potential for blame culture and short-cutting to meet difficult targets.

### **Worked Example 1.1**

**A multinational food manufacturer allocates fixed cost-saving targets to each regional manager without discussion. These managers later complain the targets are unrealistic and do not consider local supply issues, leading to demotivation and missed targets.**

> **Answer:** This is an example of a top-down budgeting process. Motivation and buy-in are low, leading to poor performance and weak control.

### **Exam Warning**

> Budgeting questions often test your ability to identify the behavioural impacts as well as the technical process. Always link your explanation of top-down budgeting to its likely effect on manager commitment, risk of bias, and responsibility.

## **BOTTOM-UP (PARTICIPATIVE) BUDGETING**

Bottom-up budgeting, also called **participative budgeting**, actively involves managers at various levels in preparing their budgets. Each department proposes its own targets, which are aggregated, reviewed, and negotiated before final approval.

> **Key Term: participative (bottom-up) budgeting**
> A budgeting method that encourages managers at each level to contribute to setting their own targets, resulting in greater ownership and motivation.

### Features (Bottom-Up)

- Managers create their own budget estimates with input from their teams.
- Budgets are reviewed and consolidated by higher management, with negotiation as needed.
- Process may take longer due to consultation and revision.
- Promotes open communication and information sharing.

### Advantages (Bottom-Up)

- Buy-in: Higher commitment from those responsible for implementation.
- Local knowledge: Plans are likely to be more realistic, as operational managers understand on-the-ground realities.
- Increases motivation: Managers are more likely to strive for targets they helped set.
- Enhances job satisfaction and teamwork.

### Disadvantages (Bottom-Up)

- Time consuming: Iterative negotiations lengthen the whole process.
- Risk of **budgetary bias**: Managers may understate targets or overstate costs to inflate slack.
- Possible conflict: Negotiations may become confrontational.

> **Key Term: budgetary bias**
> The intentional distortion of estimates by managers to make targets easier to achieve or appear more difficult, often to create budgetary slack.

### Behavioural Implications (Bottom-Up)

- Raises morale through greater sense of control and participation.
- May create pressures to lower targets unless senior management provide appropriate challenge.
- Can help nurture a performance-oriented culture.

### **Worked Example 1.2**

**A service firm asks team leaders to submit their own department budgets. Some set conservative sales forecasts and overestimate expenses, hoping to create 'cushion' (slack) for easy performance assessment. The finance director identifies this and revises budgets after discussion.**

> **Answer:** Here, participative budgeting improved motivation and realism, but risked budgetary bias (slack). Reviewing and negotiation helped control this risk.

### **Revision Tip**

> If a scenario question notes managers “accept responsibility” for budgets or “have input,” it usually describes a bottom-up approach. Always identify potential for both improved motivation and budgetary slack.

## **COMPARISON – TOP-DOWN VS BOTTOM-UP**

| Feature                               | Top-Down (Imposed)   | Bottom-Up (Participative) |
| ------------------------------------- | -------------------- | ------------------------- |
| Who sets targets                      | Senior management    | Operational managers      |
| Manager input                         | Minimal              | High                      |
| Preparation speed                     | Fast                 | Slow                      |
| Motivation and buy-in                 | Generally low        | Generally high            |
| Risk of budgetary slack               | Low                  | High                      |
| Target realism                        | May lack detail      | Often more accurate       |
| Usefulness for performance evaluation | Clear accountability | Encourages ownership      |

### **Worked Example 1.3**

**In a fast-moving retail company, bottom-up budgeting was introduced after staff pushback on imposed financial targets. Performance improved, but subsequent reviews showed some targets were set too low. The company responded by increasing review and challenge of department proposals.**

> **Answer:** Effective compromise requires a balance: participation enhances motivation, but management must review proposals carefully to prevent slack or bias.

## **FACTORS DETERMINING THE CHOICE OF BUDGETING APPROACH**

Organisations consider several factors when deciding their preferred budgeting system:

- Skill level: Do operational managers have adequate skills and information?
- Business environment: Is flexibility or speed more important?
- Organisation size, culture and structure: Decentralised, teamwork-oriented cultures favour participation.
- Nature of targets: Does the business require detailed, bottom-up analysis or is top-level guidance sufficient?
- Time pressures: Is there a need for rapid response, or can the process allow more discussion?
- Risk appetite: Is potential slack acceptable to improve motivation?

Often, hybrid or mixed approaches are used — management may set overall direction and boundaries, but encourage local input and allow negotiation on specific details.

## **BUDGETARY CONTROL AND BEHAVIOUR**

Budgeting is not only a financial exercise. The way the process is conducted shapes behaviour, for better or worse:

- **Ownership:** Participative budgets encourage responsibility and accountability.
- **Motivation:** Staff are more engaged when their views count.
- **Goal congruence:** Aligning personal and organisational objectives is easier when targets are negotiated and accepted.
- **Risk of manipulation:** Participation can introduce slack; imposed approaches can lead to disillusionment or active resistance.

> **Key Term: goal congruence**
> A situation where individual goals of managers are aligned with the overall objectives of the business, ensuring coordinated effort.

### **Exam Warning (General)**

> A common mistake is to assume that participative budgeting is always superior. Remember: while it can increase motivation, it can also introduce bias. For ACCA exams, always weigh both sides.

## **Summary**

Top-down budgeting is fast and enforces alignment, but may demotivate recipients and ignore valuable operational knowledge. Bottom-up budgeting motivates, incorporates local understanding, and improves ownership, but is slower and risks bias unless carefully reviewed.

An effective budgetary control system balances managerial input, robust review, and alignment with organisational goals.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Distinction between top-down (imposed) and bottom-up (participative) budgeting
- Typical features, advantages, and disadvantages of both approaches
- Behavioural impacts, including motivation, ownership, and responsibility
- Concept and consequences of budgetary bias and slack
- How participation influences motivation and budgetary outcomes
- Situational factors influencing approach selection
- Importance of goal congruence
- Relevance to ACCA exam requirements

## **Key Terms and Concepts**

- budgetary control
- imposed (top-down) budgeting
- participative (bottom-up) budgeting
- budgetary bias
- goal congruence

Budgetary control and behaviour - Top-down vs bottom-up approaches