Executive Summary

In this assignment, budget has been explained, where it includes different types of budgets which
are top down budgeting, Bottom up budgeting, zero based budgeting and flexible budgeting.

In budgeting there are several advantage and disadvantage of participation in the budgeting
process has been discussed and analyzed. The term responsibility centers and responsibility
accounting is explained. A responsibility center is a sub-unit of a business in which a manager
retains the authority and the responsibility of a departments performance whereby the term
responsibility accounting is the tracing of revenue and cost on the individual that is responsible
for incurring them. There are four classifications of responsibility centers, which are cost or
expense centers, revenue centers, profit centers, and investment centers. Each of the centers has
different responsibility and authority. The managers are required to arrange a report that can
evaluate the performance of their own individual centers.

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Introduction

Budget is defined as a financial plan that is used for decision making, and future prediction. A
budget contributes to a business by determining whether that the budget can operate based on a
budgeted income and expenditures for period of time. (Bhattacharyya Debarshi, 2011). The
intention of a budget is to measure and compare budgeted expenses and actual expenses, to
predict a businesss financial plan based on the results of a businesss plan and etc. A budget is
normally prepared in a yearly basis, but in some cases it is prepared in a monthly basis, for
saving and spending purposes. (Kat Kadian-Baumeyer, 2003). There are numerous type of
budget controls that is used in an organization which are Top down budgeting, Bottom up
budgeting, zero based budgeting and flexible budgeting.

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Question 1: Define the terms

a) Zero-base budgeting:

Zero-base budgeting is also well-known as priority-based budgeting. Zero based budgeting is

method where all the expenses need to be justified for every budget cycle. (Coral Woods,
2003). It is well-defined as a technique of budgeting whereby all activities are re-evaluated
each time a budget is formulated. It is an alternative budgeting system that starts with zero
base. It is newly invented budget technique where executives are required to start at Zero
Budget level every year and rationalize all the costs of the existing function in comparison
with all current and future functions. Plus, each department must request funds through a
detailed plan explaining what each allocation of funds will be used for and how does it
benefit the business. (Bhattacharyya Debarshi, 2011).

b) Bottom up budget setting

Bottom up budget setting is also known as participative budgeting. The budget holders are
given an opportunity to participate in setting the budget before sending to the top
management for approval. This means that the bottom management are able to influence the
decision making for budgeting. (Darren Woolley 2014). The top management will check the
proposed budget by the bottom management and if there is any modification or error, they
will send it back to the bottom management to correct it. (Kat Kadian-Baumeyer, 2003).

c) Top down budget setting

Top down budget setting is a non-participative method where the subordinate only have a
slight influence on the budgeting process (Colin Drury, 2004).This budget setting system
begins form the top management and it is transfer to the bottom department. This is an
advantage for the lower management because the lower management does not spend time in
preparing the budget. Top organization depend on forecasting and former results to construct
a new budget. This budget is to estimated cost of a budget where the expenditures of every
department is estimated. (Kat Kadian-Baumeyer, 2003).

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d) Flexible budget

Flexible budget is also well- known as variable budget. It is a budget that adjust the changes
in the volume of activity and it is more useful than a static budget because static budget does
not adjust the volume of the activity; and flexible budget is sophisticated (Harold Averkamp,
2004). Flexible budget analyze different expenses levels for the variable costs, relying on the
changes in the actual revenue. This budget contributes to the business by predicting the
companys future performance, and this can be used to estimate a businesss performance by
comparing it to the actual outcomes. (Colin Drury, 2004)

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Question 2: Advantages and disadvantages of participation

In budgeting there are several advantage and disadvantage of participation in the budgeting
process. (Gabriela Lidia Tanase, 2013), (Colin Drury, 2004), (Kaplan Financial Limited, 2012).

Advantages of participation in the budgeting process.

(i) Participation in the budgeting process will helps to improve the quality since the quality
control starts and is ensured at the bottom level; and there are no flaws that goes
unreported.
(ii) This will increased the motivation level of the participators because they are the one
responsible for preparing the budget where the bottom level will feel important in an
organization
(iii) This will improve the information flow between the supervisors and the subordinates
and this will lead to a more realistic, accurate and fair budget.
(iv) A better communication can be established between the supervisors and the
subordinates and also between the departments of an organization.
(v) This will increase the job satisfaction in an organization due to lower level employees
will feel involved and their suggestion or recommendation are being implemented.

Disadvantages of participation in the budgeting process.

(i) Participation in the budgeting process will slow down the decision making process
because there are many people involved in the decision making process from the lower
level to the upper level which slows down the process.
(ii) The subordinates may try to manipulate in the setting of budgets, they may allocate
the resources according to their benefit.
(iii) Sometimes the subordinates may not have sufficient, relevant or necessary
knowledge that can justify their participation in setting the budget and affect the budget
when implementing.
(iv) There may be some security issues because many people may know lots of information
about the organization since the budgeting starts form the lower level and information can
be leaked easily.

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(v) The process can be time consuming because it begin from the lower level participation,
where it can delay due to too many meetings need to be held and all the department needs
to be updated with the information in setting the budget.

Question 3 a): Define the terms

Responsibility Centers

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A responsibility center is a sub-unit of a business in which a manager retains the authority and
the responsibility of a departments performance. The detailed organization chart of an
organization is a logical source in determining the responsibility centers. The department within
an organization is the most common responsibility centers. (Harold Averkamp, 2004). There are
four types of responsibility centers which includes cost or expenses center, revenue center, profit
center, and investment center. (Colin Drury, 2004)

Responsibility Accounting

A responsibility accounting is the tracing of revenue and cost on the individual that is responsible
for incurring them. (Colin Drury, 2004). Responsibility accounting comprises of the internal
accounting and budgeting of a business and includes the preparation of the monthly and annual
budgets for each of the responsibility centers. Plus, this system allows the management to receive
the information that can evaluate the performance of their subordinates. (Harold Averkamp,
2004).

Question 3 b): Four types of responsibility centers

There are four types of responsibility centers, which are:

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Cost or expenses centers

Cost or expenses centers is one of the types included in Responsibility centers. The managers are
responsible for the Costs or expenses centers where it is under their control. There are two types
cost or expenses centers which are standard cost center and discretionary cost center. The
standard cost centers key features is that both output and input produce can be measured,
however, discretionary cost centers deal with the output that cannot be measured in the financial
terms. (Colin Drury, 2004). The cost centers have no control over the sales price, hence, it can
be only evaluate based on the total cost of a product. For planning purposes, cost estimation is
used to estimate budgets. The cost centers performance is measured according to the total cost
that incurred during the accounting period. (Mark P. Holtzman, 2015).

Revenue Centers

Revenue Centers is one of the segment of an organization where the managers held responsible
for the financial outputs which is generated by the businesss activities, mainly in generating
sales revenue. (Rohit Agarwal, 2015). Usually, the managers held the authority for the revenue
but sometimes they have also some controls on cost where these costs include selling expenses,
salesperson salaries, commission, and etc. (Colin Drury, 2004). Revenue Centers performance is
evaluated by comparing the actual revenue with the budgeted revenue; and also compare the
actual marketing expenses with the budgeted marketing expenses. (Rohit Agarwal, 2015).

Profit Centers

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Profit Centers is one of the segment of an organization where the managers held the authority to
make any decision that affect both the costs and revenue for a department. (Colin Drury, 2004).
The key reason of a Profit Center is to earn profit and the performances is evaluated by whether
the profit center has achieved its budget profit. Profit Center is where the division of a business
produces and markets a product. For example, a businesss department managers decides the
selling price of a product, production policies and also marketing programs. (Rohit Agarwal,
2015).

Investment centers

Investment Centers is where the managers held responsibilities for both sales costs and revenue.
The manager of investment centers have controls over expenses, revenue and the invested
amount in the centers assets. (Colin Drury, 2004). Investment on the assets whereby the
manager has the responsibility in buying, selling and using the divisional assets. So, managers of
investments have more responsibilities than the managers of both cost center and profit center.
Plus, they held the authority to make decision in terms of working capital and capital
investments. (Mark P. Holtzman, 2015).

Reference

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Books

1. Bhattacharyya Debarshi (2011). Management Accounting. Pearson Education India.

2. Colin Drury (2004). Management and Cost Accounting, 6th Value Media Edition.

Journal

1. Gabriela Lidia Tanase (2013). An Overall Analysis of Participatory Budgeting

Advantages and Essential Factors for an Effective Implementation in Economic Entities.
Bucharest Academy of Economic Studies, Bucharest, Romania.

Website

1. Coral woods (2003) Zero-Based Budgeting: Definition, Advantages, Disadvantages &

Examples Retrieved from: http://study.com/academy/lesson/zero-based-budgeting-
definition-advantages-disadvantages-examples.html
2. Kat Kadian-Baumeyer (2003). Budget Controls: Top-Down, Bottom-Up, Zero-Based &
Flexible Budgeting. Retrieved from: http://study.com/academy/lesson/budget-controls-
top-down-bottom-up-zero-based-flexible-budgeting.html
3. Darren Woolley (2014). Top down or bottom up budgeting which approach is best?
Retrieved from: http://www.trinityp3.com/2014/02/top-down-or-bottom-up-budgeting/
4. Harold Averkamp (2004). What is a flexible budget? Retrieved from:
http://www.accountingcoach.com/blog/flexible-budget
5. Mark P. Holtzman (2015). Managerial Accounting: Types of Responsibility Centers.
Retrieved from: http://www.dummies.com/how-to/content/managerial-accounting-types-
of-responsibility-cent.html
6. Rohit Agarwal (2015). 4 Types of Responsibility Centers. Retrieved from:
http://www.yourarticlelibrary.com/accounting/responsibility-accounting/4-types-of-
responsibility-centres/52904/
7. Kaplan Financial Limited. (2012). Top down and Bottom up Budgeting. October 18,
2015, Retrieved from: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Top
%20down%20and%20Bottom%20up%20Budgeting.aspx

Turnitin Originality Report

Management accounting 1 by Priadarshinii Lui

From MANAGEMENT ACCOUNTING (MANAGEMENT ACCOUNTING BAC/BAF SEPT-DEC 2015)

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 Processed on 31-Oct-2015 21:27 MYT

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paper text:

Introduction Budget is defined as a financial plan that is used for decision making, and future
prediction. A budget contributes to a business by determining whether that the budget can operate
based on a budgeted income and expenditures for period of time. (Bhattacharyya Debarshi, 2011).
The intention of a budget is to measure and compare budgeted expenses and actual expenses, to
predict a businesss financial plan based on the results of a businesss plan and etc. A budget is
normally prepared in a yearly basis, but in some cases it is prepared in a monthly basis, for saving
and spending purposes. (Kat Kadian-Baumeyer, 2003). There are numerous type of budget controls
that is used in an organization which are Top down budgeting, Bottom up budgeting, zero based

Page | 11
budgeting and flexible budgeting. Question 1: a) Zero-base budgeting: 1Zero-base

budgeting is also well -known as priority- based budgeting. Zero based budgeting is

method where all the expenses need to be justified for every budget cycle. (Coral Woods, 2003). It is
well-defined as a technique of budgeting whereby all activities are re-evaluated each time a budget
is formulated. It is an alternative budgeting system that starts with zero base. It is newly invented
budget technique where executives are required to start at Zero Budget level every year and
rationalize all the costs of the existing function in comparison with all current and future functions.
Plus, each department must request funds through a detailed plan explaining what each allocation of
funds will be used for and how does it benefit the business. (Bhattacharyya Debarshi, 2011). b)
Bottom up budget setting Bottom up budget setting is also known as participative budgeting.

The 1budget holders are given an opportunity to participate in setting the budget

before sending to the top management for approval. This means that the bottom management are
able to influence the decision making for budgeting. (Darren Woolley 2014). The top management
will check the proposed budget by the bottom management and if there is any modification or error,
they will send it back to the bottom management to correct it. (Kat Kadian-Baumeyer, 2003). c) Top
down budget setting Top down budget setting is a non-participative method where the subordinate
only have a slight influence on the budgeting process (Colin Drury, 2004).This budget setting system
begins form the top management and it is transfer to the bottom department. This is an advantage
for the lower management because the lower management does not spend time in preparing the
budget. Top organization depend on forecasting and former results to construct a new budget. This
budget is to estimated cost of a budget where the expenditures of every department is estimated.
(Kat Kadian-Baumeyer, 2003). d) Flexible budget Flexible budget is also well- known as variable
budget. It is a budget that adjust the changes in the volume of activity and it is more useful than a
static budget because static budget does not adjust the volume of the activity; and flexible budget is
sophisticated (Harold Averkamp, 2004). Flexible budget analyze different expenses levels for the
variable costs, relying on the changes in the actual revenue. This budget contributes to the business
by predicting the companys future performance, and this can be used to estimate a businesss
performance by comparing it to the actual outcomes. (Colin Drury, 2004) Question 2: (Gabriela Lidia
Tanase, 2013), (Colin Drury, 2004), (Kaplan Financial Limited, 2012). Advantages of participation in
the budgeting process. (i) Participation in the budgeting process will helps to improve the quality
since the quality control starts and is ensured at the bottom level; and there are no flaws that goes
unreported. (ii) This will increased the motivation level of the participators because they are the one

Page | 12
responsible for preparing the budget where the bottom level will feel important in an organization (iii)
This will improve the information flow between the supervisors and the subordinates and this will
lead to a more realistic, accurate and fair budget. (iv) A better communication can be establish
between the supervisors and the subordinates and also between the departments of an
organization. (v) This will increase the job satisfaction in an organization due to lower level
employees will feel involved and their suggestion or recommendation are being implemented.
Disadvantages of participation in the budgeting process. (i) Participation in the budgeting process
will slow down the decision making process because there are many people involved in the decision
making process from the lower level to the upper level which slows down the process. (ii) The
subordinates may try to manipulate in the setting of budgets, they may allocate the resources
according to their benefit. (iii) Sometimes the subordinates may not have sufficient, relevant or
necessary knowledge that can justify their participation in setting the budget and affect the budget
when implementing. (iv) There may be some security issues because many people may know lots of
information about the organization since the budgeting starts form the lower level and information
can be leaked easily. (v) The process can be time consuming because it begin from the lower level
participation, where it can delay due to too many meetings need to be held and all the department
needs to be updated with the information in setting the budget. Question 3 a Responsibility Centers
A responsibility center is a sub-unit of a business in which a manager retains the authority and the
responsibility of a departments performance. The detailed organization chart of an organization is a
logical source in determining the responsibility centers. The department within an organization is the
most common responsibility centers. (Harold Averkamp, 2004). There are four types of responsibility

centers which includes cost or 2expenses center, revenue center, profit

center, and investment center. (Colin Drury, 2004) Responsibility Accounting A

responsibility accounting is the tracing of revenue and cost on the individual that is responsible for
incurring them. (Colin Drury, 2004). Responsibility accounting comprises of the internal accounting
and budgeting of a business and includes the preparation of the monthly and annual budgets for
each of the responsibility centers. Plus, this system allows the management to receive the
information that can evaluate the performance of their subordinates. (Harold Averkamp, 2004).
Question 3 b): Cost or expenses centers Cost or expenses centers is one of the types included in
Responsibility centers. The managers are responsible for the Costs or expenses centers where it is
under their control. There are two types cost or expenses centers which are standard cost center
and discretionary cost center. The standard cost centers key features is that both output and input
produce can be measured, however, discretionary cost centers deal with the output that cannot be

Page | 13
measured in the financial terms. (Colin Drury, 2004). The cost centers have no control over the sales
price, hence, it can be only evaluate based on the total cost of a product. For planning purposes,
cost estimation is used to estimate budgets. The cost centers performance is measured according to
the total cost that incurred during the accounting period. (Mark P. Holtzman, 2015). Revenue
Centers Revenue Centers is one of the segment of an organization where the managers held
responsible for the financial outputs which is generated by the businesss activities, mainly in
generating sales revenue. (Rohit Agarwal, 2015). Usually, the managers held the authority for the
revenue but sometimes they have also some controls on cost where these costs include selling
expenses, salesperson salaries, commission, and etc. (Colin Drury, 2004). Revenue Centers
performance is evaluated by comparing the actual revenue with the budgeted revenue; and also
compare the actual marketing expenses with the budgeted marketing expenses. (Rohit Agarwal,
2015). Profit Centers Profit Centers is one of the segment of an organization where the managers
held the authority to make any decision that affect both the costs and revenue for a department.
(Colin Drury, 2004). The key reason of a Profit Center is to earn profit and the performances is
evaluated by whether the profit center has achieved its budget profit. Profit Center is where the
division of a business produces and markets a product. For example, a businesss department
managers decides the selling price of a product, production policies and also marketing programs.
(Rohit Agarwal, 2015). Investment centers Investment Centers is where the managers held
responsibilities for both sales costs and revenue. The manager of investment centers have controls
over expenses, revenue and the invested amount in the centers assets. (Colin Drury, 2004).
Investment on the assets whereby the manager has the responsibility in buying, selling and using
the divisional assets. So, managers of investments have more responsibilities than the managers of
both cost center and profit center. Plus, they held the authority to make decision in terms of working
capital and capital investments. (Mark P. Holtzman, 2015).

Page | 14