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Budget Types

18/04/2016

Budget Types

Fixed budget

  • Can be divided into different categories.
  • Different planning approach to flexible budget.
  • Based on fixed period of time & finding best way to achieve particular objective.
  • e.g. Sales budget shows how sales targets will be met.

Flexible budget

  • Can change as business changes.
  • Changing business conditions can result in different outcomes than those initially budgeted for – flexible budget considers this.
  • e.g. sales budget amended if sudden increase in sales.

Zero-based budget

  • Financial information used in most budgets based on historical figures.
  • Some costs such as labour & raw materials relatively easy to value.
  • Some not so easy such as marketing, admin or computer services.
  • Where costs can’t be justified, no money allocated to budget – know as zero-based budgeting (ZBB).
  • Manager needs to show particular spending will generate benefit toward meeting business objectives in order to get money.
  • Different process to extrapolating from past costs.
  • Encourages regular review of costs & minimises unnecessary spending.
  • Concept of opportunity cost linked to ZBB.
    • Cost of next best alternative
    • Businesses try to minimise opportunity costs
  • ZBB cautious approach to spending, as is opportunity costs.
  • Both include element of value for money

Main advantages of ZBB

  • Allocation of resources should be approved.
  • Questioning attitude developed – reduction in unnecessary costs and inefficient practices.
  • May improve staff motivation – evaluation skills used, able to develop better understanding of operations.
  • Encourages managers to look for alternatives.

Disadvantages of ZBB

  • Time consuming – need to gather and analyse detailed information to support spending decisions.
  • Requires skilful decision making, organisation may not have those skills. Decisions may be based on subjective views.
  • Threatens status quo – motivation may suffer.
  • Manager may not be prepared to justify spending. Organisation may then miss out on benefits.

Need to identify following with ZBB approach:

  • Its purpose
  • Expected outcome for different levels of expenditure
  • Possible alternative courses of action

ZBB basically complete review of activities & processes in organisation. Resource and time intensive. Seldom used, often regarded as too expensive. Useful on three to five year cycle.

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From → 01 - Budgets

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