How are top-down and bottom-up budgets created? What advantages does each approach hold over the other?

Question

What will be an ideal response?

Answer 1

Top-down budgeting requires direct input from the organization's top management; in essence, this approach seeks to first ascertain the opinions and experiences of top management regarding estimated project costs. Bottom-up budgeting begins inductively from the work breakdown structure to apply direct costs to project activities that are then aggregated, first at the work package level, then at the deliverable level, at which point all task budgets are combined, and then higher up the chain to create an overall project budget. Top-down budgeting has the benefit of experienced senior personnel getting directly involved in project estimation, but can create friction between departments, functions, and managers at lower levels in the organization as they scramble for the largest share of the budget that they can grab. Bottom-up budgeting emphasizes the need to create detailed plans and facilitates coordination between project managers and functional department heads. Unfortunately, bottom-up budgeting reduces top management's control of the budget process to one of oversight and may result in a disconnect between their strategic plans and the direction the project is taking.