Which budget approach is most favorable?
Expert-Verified Answer
What method of budgeting is more effective than the top-down approach?
Key takeaways. Top-down budgeting is centralized, quicker, and FP&A-driven but typically lacks employee buy-in. Bottom-up budgeting leads to higher employee buy-in and more accurate budget but might lead to over-budgeting or lack a focused directive.
What are the approaches to budgeting?
In Financial Planning and Analysis (FP&A), two predominant budgeting approaches have consistently vied for prominence: bottom-up budgeting and top-down budgeting. While both methodologies aim to allocate resources efficiently and align with organizational objectives, their derivation and execution differ significantly.
Which approach to budgeting approach is most effective because lower level employees are involved in the budgeting process?
Bottom-Up Budget Pros
Gives the clearest picture of each department's costs and resources. Empowers employees at the lowest level to take ownership of their department. Motivates employees to meet financial objectives because they took part in defining them.
How do you know if a budget is favorable or unfavorable?
Favorable variances are defined as either generating more revenue than expected or incurring fewer costs than expected. Unfavorable variances are the opposite. Less revenue is generated or more costs incurred.
What is favorable or unfavorable budget?
A favorable budget variance refers to positive variances or gains; an unfavorable budget variance describes negative variance, indicating losses or shortfalls.
Why is top-down approach better?
This style can be applied at the project, team, or even the company level, and can be adjusted according to the particular group's needs. Many teams go with the top-down approach because it eliminates confusion, reduces risk, and keeps initiatives organized across larger teams.
Which approach is better of capital budgeting?
The net present value approach is the most intuitive and accurate valuation approach to capital budgeting problems. Discounting the after-tax cash flows by the weighted average cost of capital allows managers to determine whether a project will be profitable or not.
What is the top to bottom budget approach?
Top-down budgeting refers to a budgeting method where senior management prepares a high-level budget for the company. The company's senior management prepares the budget based on its objectives and then passes it on to department managers for implementation.
What is the most effective way to budget?
We recommend the popular 50/30/20 budget to maximize your money. In it, you spend roughly 50% of your after-tax dollars on necessities, including debt minimum payments. No more than 30% goes to wants, and at least 20% goes to savings and additional debt payments beyond minimums.
What is the easiest budget method?
The pay-yourself-first budget
With this method, you set aside a specific amount from each paycheck for savings and debt payments, spending the rest as you see fit. For example, you may want to pay off high-interest debt while slowly contributing toward an emergency fund.
What is the ideal budget plan?
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Which budgeting approach is more favourable to obtain employee support?
The budgeting approach that is most favorable to obtain employee support is: Participative budgeting.
Which approach to budgeting is most used by businesses?
Incremental budgeting method
One of the most common strategies used in business, the incremental budgeting method is straightforward and easy to learn. It uses last year's figures as the basis for the current year's budget. You adjust last year's figures by an increment (or percentage) to arrive at the current figures.
What are the two budgetary approaches?
Because budgeting is a process of preparing detailed projects of future amounts, we can create a budget in many ways, including: top-down or bottom-up. incremental.
Which of the items in the budget has a favorable variance?
A favorable budget variance happens when your actual figures are better than expected. Higher revenue or lower costs both count as favorable variances.
What is Favourable and Unfavourable flexible budget?
If the actual results cause net income to be higher than budgeted net income (such as more revenues than budgeted or lower than budgeted costs), the variance is favorable. If actual net income is lower than planned (lower revenues than planned and/or higher costs than planned), the variance is unfavorable.
What is the reason for favorable variance?
A favorable variance occurs when the cost to produce something is less than the budgeted cost. It means a business is making more profit than originally anticipated. Favorable variances could be the result of increased efficiencies in manufacturing, cheaper material costs, or increased sales.
What does favorable and unfavorable mean?
Definition: “Favorable attitude” is defined as a person's positive assessment of a behavior or related construct (such as a specific product or source of service). “Unfavorable attitude” is defined as a person's negative assessment of a behavior or related construct.
How do you know if a flexible budget variance is favorable or unfavorable?
Variances are categorised as either favourable or unfavourable. A favourable variance is when revenue is higher than budgeted or expenses are lower than budgeted. An unfavourable variance is when revenue is lower than budgeted or expenses are higher than budgeted.
Which of the following is an unfavorable budget variance?
An unfavorable budget variance is when the actual amount is more than the budgeted amount, meaning that you are overspending or generating less revenue than expected.
What is the top-down approach used for?
A top-down approach is used when management wants to improve overall reliability and/or does not know what the principal causes of problems may be.
What are the weakness of top-down approach?
Top-down approaches are weak with regards to key factors such as local ownership, adequately building on local strengths, and locally-guided change of social norms. Quite often, the interventions used do not fit the local context. As a result, they are limited in their effectiveness and sustainability.
What is a top-down approach example?
The top-down approach is defined as a system of management in which decisions, ideas, and designs flow from the top executive to the staff. For example, the CEO of a company may decide to implement a new incident reporting system.
Why is NPV the best method?
The advantage to using the NPV method over IRR using the example above is that NPV can handle multiple discount rates or varying cash flow directions. Each year's cash flow can be discounted separately from the others, so the NPV method is more flexible when evaluating individual periods.
