Five years ago, Jack Cadence left his position at a large company to start Advanced Technologies Company (ATC), a software design company. Continued growth and robust sales led Cadence to hire seasoned managers and an experienced accountant, Sally Cross. Recently, Cadence decided that the company had become too large to run on an informal basis and that a budget was necessary. Cadence asked Cross to work with him on developing an initial budget for ATC.
Cadence forecasted sales based on his own projections for both the market growth of his initial product and successful completion of new products. Cross used this data to construct the master budget for the company, which were broken down into department budgets. They met a number of times over a three-week period to hammer out the details of the budgets.
When Cadence & Cross were satisfied with their work, the various departmental budgets were distributed to the department managers with a cover letter explaining ATC's new budgeting process. The letter requested everyone's assistance in working together to achieve the budget objectives. Several of the department managers were displeased with how the budgeting process was undertaken. In discussing the situation among themselves, they felt that some of the budget projections were overly optimistic and not realistically attainable.
Questions:
1. While most managers may prefer the bottom-up budgeting approach or participative budgeting system, can you identify circumstances where the top-down budgeting approach would be preferable?