Explain what the following types of budgets are and when they should be used: top-down versus bottom-up; incremental versus zero-based; comprehensive versus limited-in-scope; fixed versus flexible; discreet versus continuous.
In top down budgeting, senior management develops the budget; whereas, in bottom up budgeting, department managers prepare the budget and send upward to senior management for approval. You would use bottom up budgeting to help secure buy-in and committment by department managers to the budget. In incremental budgeting, managers are only required to justify any requests for increases over the prior year. In contrast, with zero-based budgeting, managers must justify each line item regardless of whether it requires an increase, same level of funding or even a decrease. Zero based budgeting is used when an organization is trying to increase its profit margin (if for profit) or trying to break even following a tough year or in an extremely competitive market if non-profit. In a comprehensive budget, department managers are required to prepare all aspects of their departmental budgets including both capital and operating budgets. In a limited budget, other members of the HCO contribute the preparation of portions of the budget and the managers are only responsible for a certain area. The comprehensive budgeting process helps the managers assume a larger level of accountability for preparing a budget that is realistic and fiscally responsible, and accountability in operating within the budget. In a fixed budget, assumptions are made that operating expenses are relatively stable and predictable during each period of the budget so they are budgeted equally throughout the fiscal year. In a variable budget the expenses are allocated based upon historical knowledge of the fluctuations or based upon newly planned expenditures. Organizations using cash accounting practices often choose the variable budget to help plan for expenditures based upon planned cash flow. In a discrete budget any monies that were unused by departments during a year are lost to the department manager, but in a continuous budget the unused budgeted funds carry into the next fiscal period. Some organizations use the discrete budget method to help ensure the department managers do not overbudget or pad their expenses but are being realistic and financially prudent in their planning process.