## **Learning Outcomes**

After reading this article, you will be able to distinguish top-down and bottom-up budget processes, explain the concept of participative budgeting, discuss the behavioural consequences of different budget frameworks, and critically evaluate circumstances in which each approach is appropriate. You will also be able to apply your knowledge to ACCA Performance Management (PM) exam questions on budgetary planning and control.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you are required to understand how budget frameworks influence planning, control, and motivation. This includes analysing different methods of setting budgets and the impact of participation. For revision, focus on:

- The difference between top-down (imposed) and bottom-up (participative) budget-setting
- The benefits and drawbacks of each approach
- The meaning and implications of participation in the budget process
- The impact of budget frameworks on managerial motivation and performance
- Situations where one budget framework may be preferred over another

## **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 budget setting approach is most likely to result in greater managerial motivation?
   a) Top-down
   b) Bottom-up
   c) Rolling
   d) Incremental

2. State one advantage and one disadvantage of imposed (top-down) budgets.

3. True or false? Participation in budget-setting always leads to a better budget.

4. Which type of budget is usually preferred in a crisis when time is short, and why?

## **Introduction**

A robust budget framework is essential for effective planning and control. In practice, two primary approaches exist: **top-down (imposed)** budgets, where senior management sets targets and resource allocations for lower levels, and **bottom-up (participative)** budgets, where budget holders at all levels contribute to setting their own targets. The extent of participation in the budget-setting process can have significant effects on motivation, coordination, goal alignment, and the quality of forecasting.

> **Key Term: top-down budgeting**
> A budgetary approach in which senior management sets targets and budget limits without detailed input from operational managers.
>
> **Key Term: bottom-up budgeting**
> A budgetary approach in which budget holders at each level participate in building the budgets relevant to their area, with consolidation and review by higher management.
>
> **Key Term: participative budgeting**
> A process where all budget holders have the opportunity to influence or contribute to the setting of their own budgets, usually as part of a bottom-up approach.

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

In a top-down budget framework, senior management sets overall financial and operational targets and allocates resources accordingly. Lower-level managers typically have limited input and are expected to work within the boundaries set.

**Advantages of top-down budgeting:**

- Fast and straightforward, particularly useful when time is limited or in periods of crisis
- Ensures that budgets are aligned with strategic objectives and resource constraints
- Senior management can allocate resources to maximize overall benefit to the organisation
- Reduces opportunities for subordinate managers to introduce bias or slack

**Disadvantages:**

- May demotivate operational managers who feel excluded from target setting
- Risk of unrealistic targets if senior management lacks detailed operational knowledge
- Can lead to poor acceptance and a reduced sense of ownership among responsible managers
- May result in budgets that ignore ground-level challenges or opportunities

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

Bottom-up budgeting gives budget holders the opportunity to propose and justify budgets for their responsibilities. These proposals are reviewed, consolidated, and potentially amended by senior management.

**Advantages of bottom-up budgeting:**

- Increases motivation and ownership as managers feel involved and their know-how is valued
- Budgets are more likely to be realistic due to input from those with detailed operational knowledge
- Helps identify operational challenges early, improving coordination and resource allocation
- Encourages cross-departmental communication and buy-in to organisational targets

**Disadvantages:**

- Can be time-consuming and resource-intensive, especially in large organisations
- Managers may attempt to build in budgetary slack, making targets easier to achieve
- Potential mismatch between local proposals and overall strategic objectives
- Senior management may need to intervene to correct inconsistencies or conflicts

## **PARTICIPATION IN BUDGET SETTING**

Participation describes the degree to which budget holders are involved in the process of setting their own budgets. This can range from passive approval to active negotiation and joint target setting.

> **Key Term: budgetary slack**
> The deliberate overstatement of costs or understatement of revenues by managers to make targets easier to achieve.

**Benefits of participation in budgeting:**

- Promotes “goal congruence” by aligning individual and organisational targets
- Enhances acceptance of budget targets and increases motivation to achieve them
- Builds morale and a sense of contribution among managers
- Leads to budgets that reflect real operational conditions

**Potential limitations:**

- Can become a vehicle for managers to manipulate targets in their favour
- May lengthen the budget process significantly
- In pseudo-participation (when upper management overrides input), demotivation can result

## **Behavioural and Organisational Considerations**

The choice of budget framework affects behaviour and organisational culture:

- **Top-down budgets** may deliver quick results and strategic focus but can discourage initiative and result in a rigid culture.
- **Bottom-up approaches** tend to encourage commitment and initiative but need strong oversight to prevent slack and misalignment with strategy.

The effectiveness of participation is also influenced by context: it is most beneficial when managers have relevant information and when operational flexibility is desired.

### **Worked Example 1.1**

A manufacturing company is facing a rapidly developing market opportunity but needs to respond quickly. Which budgeting approach is more suitable and why?

> **Answer:**
>
> In this scenario, a top-down (imposed) budgeting approach is more suitable as it allows senior management to direct resources swiftly in line with corporate strategy and time constraints. The priority is speed and direction, rather than detailed local input.

### **Worked Example 1.2**

An established service business with stable operations wants to improve motivation and obtain accurate cost forecasts. Which framework should it favour?

> **Answer:**
>
> Bottom-up (participative) budgeting is likely to be more appropriate. In a stable environment, involving managers in the budgeting process improves buy-in, motivation, and ensures budgetary targets reflect operational realities.

### **Exam Warning**

> A common exam error is stating that bottom-up budgeting is always best. In practice, both approaches have strengths and limitations; the best choice depends on the organisation’s needs and environment.

## **Summary**

|               | Top-down Budgeting           | Bottom-up Budgeting       |
| ------------- | ---------------------------- | ------------------------- |
| Main input    | Senior management            | Operational managers      |
| Speed         | Fast                         | Slower                    |
| Motivation    | Can be low                   | Usually higher            |
| Risk of Slack | Low                          | Higher                    |
| Realism       | May lack detail              | More operational input    |
| Best for      | Urgent, strategic, or crisis | Stable/routine operations |

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Distinguish top-down and bottom-up (participative) budget approaches
- Explain the behavioural and organisational effects of each framework
- Identify benefits and drawbacks of participation in budget-setting
- Apply appropriate budget frameworks to business scenarios
- Recognise when to recommend top-down versus bottom-up budgeting

## **Key Terms and Concepts**

- top-down budgeting
- bottom-up budgeting
- participative budgeting
- budgetary slack


Budget frameworks - Top-down vs bottom-up and participation