Pothula/Akhil/24th oct Ch.7/pg.

305/Q1 & 10

Q1) What are the advantages of top-down budgeting? Of bottom-up budgeting? What is the

most important task for top management to do in bottom-up budgeting?

Top-Down Budgeting:

This type of budgeting is based on collecting the ideas, experiences and decisions of top and

middle management and the available past data. These managers estimate an overall budget

as well the costs that will compromise due to the subprojects.

Advantages of Top-Down budgeting:

1) The over-all budgets can be estimated and calculated accurately with a very few errors In

the elements.

2) The different categories of budget are stable along with the statistical distribution of each

of them increasing the predictability.

3) The small tasks need not to be individually identified as sometimes those small task will be

ignored as they are small.

4) The experience and decisions of the executive management are considered automatically

all the factors into the estimation.

Bottom-Up Budgeting:

In this type of budget, tasks, their schedules and their individual budgets are constructed. The

estimates are made in terms of resources such as labour hours and materials

Advantages of bottom-Up Budgeting:

1) The members who are closer to the work tend to have more precise idea about the

requirements of resources compared to the ones who are not involved in that particular work.
2) Due to the direct involvement of the low level managers, there is an increase in the

probability that they will accept the result much faster.

3) The involvement in work for the junior workers is a good managerial training technique to

be used which will be useful while generating the budget as the experience provided to them

is valuable.

In the bottom-up budgeting the most important role by the senior management is to decide

whether to hand over the control of projects to subordinates whose experiences are

questionable. They are reluctant in giving the whole control to them as the each of the

projects lasts about 5 to 8 years and costs millions of dollars. The senior management see the

bottom-up budgeting particularly risky.

Example- Non-Work: I worked as a secretary in an NGO where we had to estimate budgets

for projects(events) which are related to helping the poor and needy. The costs are to be

estimated and are to collected from member, students and different societies which are

willing to help us. All the budgets are managed by president, secretary and treasurer in our

organisation. We have to divide the costs according to the product type which are to be given

to the needy ones in a social welfare organisation.

Q10) How does a risk analysis operate? How does a manager interpret the results?

A) It is a procedure which provides a range of outputs and probabilities based on the

distribution of input factors. Risk estimation and analysis don’t remove the ambiguity but it

just defines the uncertainties faced during decision making. While applying risk analysis, you

have to make assumptions about the probability distributions which are the key elements and

variables associated with a decision and then these factors are used to estimate the risk profile

for the outcome of a decision. This type of analysis can be achieved by using Monte Carlo

simulation, a technique which is easy to use that is well adapted to evaluate risks in some
particular needed situations. When the decisions contain numerous amount of variable in the

input, then complex calculations are done by using different analytical methods. The software

in which the analysis is done allows us to provide the input in a mathematical model and then

selects sample from the assumptions. This software will then put these input variables and

then will find the outcomes. This process is repeated continuously and then the statistical

distribution of outcomes is displayed. The main use of this software is to show the decision

maker the distribution of outcomes. This risk profile assess the value of the decision taking

into consideration all the other factors.

The range and distribution for costs and revenues are

estimated by using these to calculate the profitabilities helping the project managers to have a

way to make project based decisions. Simulation is the best way to evaluate such type of

situations. After checking the nature of input data, then crystal ball is used to check the risk

analysis in a budget.

Example: Non-Work- During our final year project in B. Tech, it was design, analysis and

optimization of truck chassis, we had to design and find the risk of failure of the chassis

frame under applied loads and under given conditions. The factors and limits are calculated

such the chassis frame can withstand huge amount of loads without causing any failures in

the system reducing the total risk.