9024812
Budgeting
- Fixed Budgets
- Prepared on the basis of an estimated volume of production and an
estimated volume of sales No variants of the budget are made to cover the
event that actual and budgeted activity levels differ They are not adjusted
(in retrospect) to reflect actual activity levels
- Prepared on the basis of an estimated volume of production and an
estimated volume of sales No variants of the budget are made to cover the
event that actual and budgeted activity levels differ They are not adjusted
(in retrospect) to reflect actual activity levels
- Zero Based Budgeting
- This approach treats the preparation of the budget for each period as
an independent planning exercise
- The initial budget is zero and every item of expenditure has to be justified
in its entirety to be included (although in reality managers would start from
their current level of expenditure and work downwards)
- Mainly used in non-profit organisations but it
can also be applied to discretionary costs and
support activities in profit organisations. Also
currently, extensively used in consumer
staples sector
- Where there are costs linked with statutory/legal requirements, then ZBB should be used
with caution. It can still be used in sourcing more cost efficient ways to provided services
but quality and meeting minimum statutory/legal requirements are key.
- Where there are costs linked with statutory/legal requirements, then ZBB should be used
with caution. It can still be used in sourcing more cost efficient ways to provided services
but quality and meeting minimum statutory/legal requirements are key.
- It seeks to overcome the deficiencies of incremental budgeting.
- Step 1 Budget holders specify activities
- Step 2 Define decision packages - a specific activity so that it can be evaluated and ranked. Can be
mutually exclusive packages or incremental packages
- Step 3 Evaluate and rank packages on the basis of their benefit to the organisation
- Step 4 Allocate resources according to the funds available and the ranking of packages
- Step 4 Allocate resources according to the funds available and the ranking of packages
- Step 3 Evaluate and rank packages on the basis of their benefit to the organisation
- Step 2 Define decision packages - a specific activity so that it can be evaluated and ranked. Can be
mutually exclusive packages or incremental packages
- Advantages
- 1) Identifies and removes inefficient and/or obsolete operations 2) Provides a psychological impetus to
employees to avoid wasteful expenditure 3) Leads to a more efficient allocation of resources 4) It
responds to changes in the business environment 5) ZBB documentation provides an in-depth
appraisal of an organisation’s operations
- 1) Identifies and removes inefficient and/or obsolete operations 2) Provides a psychological impetus to
employees to avoid wasteful expenditure 3) Leads to a more efficient allocation of resources 4) It
responds to changes in the business environment 5) ZBB documentation provides an in-depth
appraisal of an organisation’s operations
- Disadvantages
- 1) Involves a lot of time and effort and paperwork 2) Can cause suspicion when introduced
3) Costs and benefits of different alternative courses of action can be difficult to quantity
4) Ranking can prove problematic 5) Calls for management skills which the organisation may
not possess 6) Can cause conflict between departments in limited resource situations
- 1) Involves a lot of time and effort and paperwork 2) Can cause suspicion when introduced
3) Costs and benefits of different alternative courses of action can be difficult to quantity
4) Ranking can prove problematic 5) Calls for management skills which the organisation may
not possess 6) Can cause conflict between departments in limited resource situations
- This approach treats the preparation of the budget for each period as
an independent planning exercise
- Rolling Budgets
- A Rolling Budget is a budget that is continuously update by adding a
further accounting period each time the accounting period is
completed. Always looks at 12 months of budget. Complete 1st period
(say a month or a quarter), remove from budget and add another
month or quarter on the end. Useful in times of uncertainty
- Advantages
- Reduce uncertainty
Up-to-date budget
always available
Realistic budgets are
better motivators
- Reduce uncertainty
Up-to-date budget
always available
Realistic budgets are
better motivators
- Disadvantages
- Time consuming
Become a chore for
budget holders and
may demotivate
- Time consuming
Become a chore for
budget holders and
may demotivate
- Advantages
- A Rolling Budget is a budget that is continuously update by adding a
further accounting period each time the accounting period is
completed. Always looks at 12 months of budget. Complete 1st period
(say a month or a quarter), remove from budget and add another
month or quarter on the end. Useful in times of uncertainty
- Incremental Budgeting
- This involves adding a certain percentage to last year’s budget or
actual figures to allow for growth and inflation It encourages slack
and wasteful spending to creep into budgets This involves adding a
certain percentage to last year’s budget or actual figures to allow for
growth and inflation It encourages slack and wasteful spending to
creep into budgets. It is an acceptable method if current operations
are economical, effective and as efficient as possible. It is most
suitable for stable businesses where costs are not expected to change
significantly. There should be good cost control and limited
discretionary costs.
- This involves adding a certain percentage to last year’s budget or
actual figures to allow for growth and inflation It encourages slack
and wasteful spending to creep into budgets This involves adding a
certain percentage to last year’s budget or actual figures to allow for
growth and inflation It encourages slack and wasteful spending to
creep into budgets. It is an acceptable method if current operations
are economical, effective and as efficient as possible. It is most
suitable for stable businesses where costs are not expected to change
significantly. There should be good cost control and limited
discretionary costs.
- Flexible and Flexed Budgets
- Budgets which, by recognising different cost
behaviour patterns, change as activity levels change.
Flexible budgets can be drawn up to show the effect
of different volumes of output and sales differing
from budgeted volumes. At the end of a period,
actual results can be compared to a flexed budget. A
flexed budget is what results should have been at
actual output and sales volumes as a control
procedure.
- A good knowledge of cost behaviour is essential for flexible and
flexed budgeting.
- A good knowledge of cost behaviour is essential for flexible and
flexed budgeting.
- Budgets which, by recognising different cost
behaviour patterns, change as activity levels change.
Flexible budgets can be drawn up to show the effect
of different volumes of output and sales differing
from budgeted volumes. At the end of a period,
actual results can be compared to a flexed budget. A
flexed budget is what results should have been at
actual output and sales volumes as a control
procedure.
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