Incremental Budget

This is the budget which is based on the figures of the last year (actual or budget) and then allow the
expected changes to be incorporate, like any inflation or any other known changes.
It is suitable for the stable business, where cost are not expected to change significantly. There should be
good cost control and limited discretionary costs.
Advantages of incremental budget
- Quick and easy method to prepare the budget.
- Suitable for the organisation operating in stable environment and when the historic costs are
acceptable.
- The budgetary data is easily available.
Drawbacks of incremental budget
- No learning opportunity to think new methods of cost control since the budgetary approach is
being carried down of last year.., like say outsourcing might be cheaper this year, but incremental
budget encourages to follow in-house production as it was in last year, that is, uneconomic
activities are being continued.
- Any inefficiency or slack in the last year is likely to be continued.
- It is not suitable for the business operating in changing environment.

Zero Based Budget (ZBB)

- It first rejects the assumptions of incremental budgets, due to the chances of continuation of
previously inefficiency in budgets.
- It says that every year budge shall be prepared from “scratch”, means the BASE will be ZERO – it
means the budget is prepared as if it is being prepared for the first time.
- Every activity in the budget (decision package) must be justified and justifications will be on the
basis of cost-benefit.
Steps/Approach of ZBB
1) Define decision package
It involves identification of activities for which budget is going to be prepared.
- Base package.
It involves the minimum activity to be carried out.
- Incremental package.
Activity above base package.
- Mutually exclusive package.
Alternate ways of doing the same work.

2) Evaluate and Rank

It involves the evaluation of activities based on the cost-benefit and value for the organisation,
although can be a lengthy process. Some tasks like legal obligation will be given high priority.

3) Allocation of resources
It involves the allocation of resources according to the availability of funds and based on the setp#2
above.

Budgetary systems 1 By:- Haris Hanif

Advantages of ZBB
- It enables the close examination of organisation’s operations and consider the activities based on
the use and its costs.
- It facilitates the company to identify and remove inefficiency or obsolete operations.
- It enables to allocate the resources more efficiently and challenges the status quo.
- It responds to the changes in the business environment.
Drawbacks of ZBB
- Time consuming task and needs lot of paper work.
- May be focusing on the short term at the expense of the long term aspect.
- Need to have more budgetary data and may be possible that information system of the company
may not be able to provide suitable information.
- Analysis and ranking including evaluation of activities may call for skills and may be training is
needed for the management.
- Difficulty in ranking, like conflicts among staff, quality or quantitative aspects etc.
USAGE OF ZBB
It does NOT work well for direct manufacturing cost, which are usually based on the standard costing and
other management techniques.
ZBB is best useful to support expenses that are mostly discretionary. It is also well useful for service
industry and not-for-profit organisation such as local and central government.

Activity Based Budgets (ABB)

It is the budgeting which is based on the concept of Activity Based Costing which involves identification of
overheads costs and the cost drivers and then making the budget.

For example, if an organisation expects to place 500 orders and the rate per order is $100, the budgeted
cost of the ordering activity will be 500 × $100 = $50,000.

Advantages of ABB
- It draws the attention of overheads – activities which can be the large proportion of total cost.
- It recognises the activities which drives the cost and if it can be controlled then cost can be
controlled even.
- It is also helpful in TQM (total quality management) by relating the cost of the activity to the level
of services provided.
- Important activity (critical success factors) can be identified which must be performed well to
achieve the objectives.
Drawbacks of ABB
- Considerable amount of time and efforts is needed to establish the activities and its costs.
- Difficulty to trace suitable cost driver.
- Sometimes training is needed for the staff and hence training time and cost will be there.

Budgetary systems 2 By:- Haris Hanif

Rolling Budget
It is the budget which is prepared and gets updated multiple times in a year.
The process begins with the preparation of the budget of the short time period – less than a year
(month/quarter) and when that short time period expires then the whole year budget will be update –
considering the actual results of the short time.
This is used in an environment where accurate forecasting cannot be made – like fast moving environment.
It is also used for tight control.

Example:-

ANSWER:-

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Advantages of Rolling Budget
- It forces the management to reassess the budget regularly and to produce budgets which are more
up to date.
- It concentrates on the uncertainty when it is smaller time period.
- More accurate planning and tight control can be ensured.
Drawbacks of Rolling Budget
- It is costly and time consuming than incremental budgets.
- It may demotivate employees if they feel that targets are getting changed after every short time
period.
- Spending too much time on the budget may lead to actual performance being distracted.

Beyond Budgeting
It says that traditional style of budgeting should not be continued, traditional budgeting has some short
comings like:-
- Focusing internally only (inward looking)
- Top down approach.
- Stringent/strict rules in budgeting.
- Fixed and not welcome the changes, that is, rigid.
Therefore more modern approach towards budgeting needs to be followed and two main principles are
identified.
(a) Adaptive management process
Being flexible rather than rigid, like adapting rolling budgets, flexed budgeting process.
(b) Decentralised management
Encouraging the culture of delegating decision making and performance accountability to line managers.

Budgetary systems 4 By:- Haris Hanif

Budgetary systems 5 By:- Haris Hanif
JUNE 2009

BUDGETING 1 By:- Haris Hanif

JUNE 2011

BUDGETING 2 By:- Haris Hanif

BUDGETING 3 By:- Haris Hanif
BUDGETING 4 By:- Haris Hanif
TICK the correct and CROSS the wrong statements.

1 Budgeting actual refers to the past trend analysis and current circumstances in order
to predict the future that what is likely to happen.
2 The best objective of preparation of budget is the setting departmental coordination
as different functional budgets are dependent on each other.
3 Planning and control cycle in which the last two steps which are measurement of
actual results and any respond to the change from the plan is the “Control” function.
4 One of the contributions of budgeting is the management of performance by giving
them target that what is expected from them.
5 Budgets are sometimes necessary for the purpose of convincing lenders and banks to
have the loan or extend the credit terms.
6 Effective control over the organizational performance is possible without planning.
7 Training the staff and polish their skills to cope up with the challenges regarding the
new products falls under the category of “strategic planning.”
8 Budgeting aims to achieve the short term targets then there are more chances to
achieve the tactical plans and ultimately victory of the strategic purpose.
9 Strategic plans focus and concentrate on the entire organization including the external
environmental influencing factors.
10 The time span of tactical level planning typically includes the 2-3 years.
11 Budgets cannot be prepared in the non-monetary values.
12 Controls are always applied in the organization after the actual negative results that
deviates with the plan prepared at the start of the year.
13 When the plan of the organization, after receiving the actual result/feedback, is
changed, this refers to the “single-loop feedback control.”
14 The impact of budgeting is on financial matters and it also impacts and leaves the
footprints on the motivations of its staff.
15 When managers are evaluated on the basis of short term aspects then it may result I
manipulation of records and poor relationships with colleagues.
16 One of the reasons behind the imposed style of budgeting is that juniors might be
biased in the inclusion of data for their comfort zone.
17 Participative approach of budgets is always suitable for the organizations.
18 Uneconomic activities are likely to be continued when the company is using the
incremental budgeting approach.
19 Zero based budgeting should always be used in the company in all scenarios and every
fiscal year to reduce the chances of previous slacks.
20 The essential purpose of zero based budgeting is the justification of cost benefit
analysis and discourages previous biasness in the budgets.
21 Flexible budgets are prepared both at the start/planning stage for the purpose of
contingency budgets and at the end of the period when actual results are received for
the purpose of comparison and budgetary control.
22 The incremental approach toward budgeting is suitable when the organization is facing
the changing circumstances with respect to the external environment.

BUDGETING 5 By:- Haris Hanif

 23 In Zero based budgeting, it may be problematic to rank the activities when the benefits
are qualitative in nature.
24 Rolling budget is an example of traditional approach towards budgets
25 Rolling budgets are best suitable for the company that has previously accurate
estimations based on the best available accurate information.
26 Rolling budgets reduces but not eliminate the chances of uncertainty in a smaller time
period.
27 Preparation of rolling budgets is NOT suitable when the company wants to place tight
control in any of the concerned area.
28 Concentration on execution of tasks may be compromised when the company is
engaged in the rolling budget exercise.
29 Beyond budgeting do not focus towards the freedom for managers to meet and
respond to the changing customers’ needs.
30 Beyond budgeting emphasizes on the “inward looking” approach for the year.
31 The chances of adding the budgetary slack increases in the beyond budgeting.
32 Beyond budgeting is against the traditional approaches like imposed style, rigidity,
focusing on targets etc.
33 Adaptive style and decentralization are the key aspects in the beyond budgeting.
34 The element of “CONTROL” in planning and control cycle starts when the company is
actually executing and implementing the tasks.
35 Response should be given when the actual results are received and is a part of
CONTROL in the planning and control cycle.
36 The best purpose of budgeting is the communication of organization’s plans and so to
reduce the chances of any ambiguity.
37 Production budget is normally the “Principal budget factor” on which various other
budgets are based.
38 Budgets are free from any uncertainty.
39 When the efficiency standards are not property established, then the best approach
towards budgets is zero based.
40 Activity based budgets simply uses the technique of activity based costing based on the
logical cost drivers to find the related costs.
41 High – Low method assumes the constant relationship between costs and volume of
activity and once of the reason for inaccurate costs estimations.
42 Expected values may be used in budgeting to determine the best combination of
expected profit and risk.
43 Preparing the probabilistic budgets may exceed the costs over benefits.
44 The usage of spreadsheets in the budgets process takes into account the qualitative
aspects of the project or of a product.
45 Spreadsheets packages are useful in the building of business models to assist the
forecasting and planning process.
46 The data can be easily corrupted or lost in spreadsheet by accidently changing the cell
value or in the wrong cell.

BUDGETING 6 By:- Haris Hanif

ANSWER:-

1 F 41 T
2 F 42 T
3 T 43 T
4 T 44 F
5 T 45 T
6 F 46 T
7 F
8 T
9 T
10 F
11 F
12 F
13 F
14 T
15 T
16 T
17 F
18 T
19 F
20 T
21 T
22 F
23 T
24 F
25 F
26 T
27 F
28 T
29 F
30 F
31 F
32 T
33 T
34 F
35 T
36 F
37 F
38 F
39 T
40 T

BUDGETING 7 By:- Haris Hanif