1. State THREE (3) issues associated with creating a project budget.

 Project managers may not have the luxury of accessing and using the historical
information that is typically available for ongoing, routine activities. And, while there
may be budgets and reports from similar projects undertaken in the past, these can
only serve as rough guides.
 The budgeting process gets even more complicated for multiyear projects, because
plans, schedules, resources, and costs are set early in the project life cycle and may
change in future years
 Accounting systems and practices typically vary from one project organization to the
next.
2. Explain the differences between top-down budgeting and bottom-up budgeting.
(HINT: Define, state procedures, advantages and disadvantages)
Top-down Budgeting
The top-down approach utilizes the judgment and experience of top and senior-level
managers, as well as past data on similar activities. It assumes that experience in past projects
will enable senior management to provide guidance on accurate cost estimates for future
projects. The rationale behind top-down budgeting is that top management may not have the
inclination or the time to estimate the precise cost of every element of a project. What they do
have, however, is the experience, knowledge, and practical understanding to provide a
reasonable aggregate estimate of the overall budget. To provide more detailed estimates, for
the various work packages and their individual tasks, personnel in the lower levels of the
organization (where the work packages and tasks are accomplished) get involved. Here’s how
the top-down approach works in practice. Senior managers first estimate the overall costs of
the project, as well as the costs of major deliverables. These projections are down to lower
level managers, who further disaggregate the projections into detailed budget estimates for
the specific work packages that comprise the deliverables. At each step down this process
continues until the project is broken into and ultimately evaluated on a task-by-task basis at
the lowest level of the project organization’s hierarchy.
Top-down Budgeting: Advantages
The advantage of top-down budgeting is that top management’s estimates of project costs, in
aggregate terms, often tend to be quite accurate. Furthermore, these aggregate estimates
provide the basis for disaggregation, which in turn provides important budgetary discipline
and cost control. Also, because senior-level managers are directly involved in developing the
project budget, there is a sense of commitment, ownership, and support.
Top-down Budgeting: Disadvantages
When used correctly, top-down budgeting can serve as a viable method for cost allocation,
but used in accordance with the philosophy that underlies it. That is, we assume that top
management may not have the inclination or the time to estimate the precise cost of every
element of the project. It expects however that they do have the experience, the knowledge,
and the practical understanding to provide a reasonable aggregate estimate of the overall
project budget. If this rationale is incorrect, it can result in some clear disadvantages when it
employs top-down budgeting. First, lower-level managers may feel that their share of the
project budget does not accurately reflect the tasks accomplished. Should senior managers
remain steadfast in their budgetary position, lower-level managers may feel that they have no
choice other than accepting what they perceive as insufficient budgetary allocations. As a
result, they may feel that they bear all the responsibility for their part of the project, should it
fail, but none of the authority to recognize and support a reasonable budget for their
activities. Second, top-down budgeting creates a potentially conflict-laden atmosphere as the
lower levels of the organization work to align their specific task budgets with the overall
project budget. Because various departments are competing for a share of a fixed amount, the
top-down approach can have the net effect of pitting one department against another and
creating adversarial relationships. When functional managers view the budgeting process in
this competitive light, there is a strong potential for political behaviour, inflated estimates,
and other competitiveness to justify inaccurate or deliberately excessive budget requests.
Third, the effectiveness of top-down budgeting depends on the accuracy and honesty with
which it is used. The technique is truly useful only when it couples with a top management
that is knowledgeable enough to make reasonable cost estimates of the project at hand; if this
is not the case, the project is immediately saddled with an unrealistic budget that cannot be
achieved. Finally, some executives use top-down budgeting inappropriately, choosing to view
it as a motivational technique for lower-level managers. The cost of a project deliberately
underestimated, in the belief that it will spur cost savings and efficiencies from subordinates.
Either of these approaches is more likely to result in staff demoralization and budget overruns
than project success.
4.3.2 Bottom-up Budgeting
The most important prerequisite for the bottom-up approach is the availability of a detailed
WBS that identifies all elements in the project, e.g., deliverables, sub deliverables, and work
packages. Utilizing the framework provided by the WBS, the bottom-up approach begins
with the construction of individual budgets that assign both direct and indirect costs
associated with labour, materials, and overhead for the most elemental tasks. An important
part of this process is consulting the personnel who regularly perform these tasks—gathering
detailed information regarding time and budget from those actually responsible ensures
highly accurate results. The resulting task-level costs then aggregates to create budgets at the
deliverable level. Subsequently, these deliverable budgets aggregates to create the overall
project budget. While it is critical that as many task elements identified and included in a
bottom-up budget as possible, it is quite difficult to develop a complete list, particularly
during the early stages of the project life cycle. Present to the top manager finished
aggregated budget, who merge and streamline the various budget proposals and ensure that
there is no overlap or double counting of requested resources. No matter where the budget
originates, top management is ultimately responsible for creating the organization’s final
master budget.
Bottom-up Budgeting: Advantages
The advantage of bottom-up budgeting, primarily, is that it forces the creation of detailed
project plans as an initial step for creating a budget. Second, the approach facilitates
participative management, because it assumes that the individuals actually performing the
tasks are more likely to have a clear understanding of resource requirements than their
superiors are. As a result, even the lowest levels of the organization become involved in the
project budgeting process, which increases its chances of acceptance. In addition, this
approach provides junior-level managers with invaluable training, experience, and knowledge
in developing a project budget. The third advantage of bottom-up budgeting is that it
facilitates coordination between project managers and the functional department managers
who must consider various resource requests as they develop their own budgets. Finally,
because bottom-up budgeting emphasizes the unique creation of budgets for each project, it
allows top management to prioritize among projects that are competing for resources. If it is
determined that there are simply more projects than money available, the process of building
a budget from the ground up gives top management additional information to use in
determining which projects they are willing to support.
Bottom-up Budgeting: Disadvantages
The major disadvantage of bottom-up budgeting is the reduced role played by top
management in the initiation and control of the budgeting process. In other words, the
impetus for developing project budgets must now come from lower level managers, while top
management’s role is limited to analysing individual budgets presented to them. This
reduction in top management’s role has the potential to create a significant division between
the organization’s strategic and operational activities. For this reason, the bottom-up
budgeting approach is less popular within many organizations. If we accept that the budget is
the most important control tool for the project organization, it is understandable that senior-
level managers are reluctant to relinquish control to inexperienced junior-level managers and
personnel. In addition, there is the possibility of budgetary game playing by junior-level
managers who overstate their budget requirements. From a practical, self-protection
perspective, there is huge incentive for junior project team personnel to exaggerate the costs
of their activities to give themselves ‘‘wiggle room.’’ Finally, the bottom-up approach can
also be a time-consuming process for top management due to the repetitive fine-tuning,
adjustments, and delays associated with budget resubmission.
Briefly explain the following terms;
i. Activity-based costing
ACTIVITY-BASED COSTING
The basis of activity-based costing is that projects consume activities, and activities consume
resources. As such, costs are initially assigned to activities (the discrete tasks that need to be
completed to deliver the project), and then assigned to projects, based on each project’s use
of resources. Activity-based costing (ABC) is frequently used for project budgeting.
Activity-based costing consists of four steps:
1. It begins with the identification of activities that make use of resources, and assigns
costs to them. This step involves using the WBS to break the project down into its
work packages. Assigning costs to each work package based on the resources required
to complete each identified activity.
2. Identify the cost drivers associated with the work package. These are elements that
cause, or ‘‘drive,’’ an activity’s costs. For example, the principle cost driver for many
project activities is human resources in the form of labour. Similarly, an important
 cost driver for construction projects is the variety of raw and finished materials
needed.
3. Next, a cost rate per unit of the cost driver is calculated. For example, human resource
values as cost of labour per hour.
4. To assign costs to a project that utilizes a cost driver, the total number of cost driver
units consumed multiplies the cost driver rate per unit.

ii. Time-phased budgets

Time-phased Budgets
The time-phased budget is an excellent project control mechanism used to achieve effective
cost control to reflect planned work on its various phases. Time phasing of project work is
critical. Time-phased budgets allocate costs across both project activities and the anticipated
time in which the budget expends. In essence, time-phased budgets consolidate the project
budget and the project schedule
iii. Tracking chart
Tracking Chart
A tracking chart is a chart produced to illustrate expected budget expenditures by plotting the
cumulative budgeted cost of the project against the baseline schedule once a time-phased
budget has been established,
D. State FOUR (4) purposes of the contingency budget.
 The purpose of including contingency funds in the budget is simply to ensure that
unforeseen events do not delay project completion.
 To offset errors associated with estimation, minor design changes, and other
omissions.
 They increase the chance of work done within the stipulated amount, which in turn
increases confidence in project success.
 If that confidence can be raised to a point where the amount of contingency appears to
be both realistic and achievable, its value as a control tool increases significantly