TECHNIQUES OF BUDGETING INCREMENTAL BUDGETING
ZERO-BASED BUDGETING
ROLLING BUDGETING
ACTIVITYBASED BUDGETING
INCREMENTAL BUDGETING
Current budgets are taken as a logical starting point for coming up with the budget for next period
Disadvantage Advantage Simple – adjust for expected changes in the next period
Assume that all current activities are worth continuing at the current levels
ZERO-BASED BUDGETING Advantages No reference to past budgets and every item is set as if the activities to which the budget relates are done for the first time.
1. Change is accepted by organization 2. Focus on objectives and goals 3. Avoid complacency 4. Focus attention on the future rather on the past
Disadvantages • Ranking process is difficult. • Takes more management time • Temptation to concentrate on shortterm cost saving at the expense of longer-term benefits. • Takes time to show the real benefits of implementing ZBB.
ROLLING BUDGET Advantages
Budget is continually updated by adding a new time period (such as a month or quarter) and dropping the period just completed.
- More realistic and achievable - Better motivational influence on managers - Less pressures or stress placed on managers to achieve unrealistic budget targets - Variance feedback is more meaningful
Disadvantages - Difficult to plan ahead accurately
- Greater work load for manager and additional staff may be required - Devote insufficient attention in preparing budgets – revised regularly
ACTIVITY-BASED BUDGETING Advantages
A method of budgeting based on an activity framework and utilizing cost driver data in the budget setting and variance feedback processes.
- The cost of activities are identified.
Disadvantages
- Activity unit cost allows easier analysis of cost, trend, over time and intra departmental comparison.
- Inaccuracies (spending versus consumption of resources, nonmanufacturing activities, shared resources)
- Resource allocation decisions are assisted by the activity related cost information
- Short term fluctuation