Budgeting 2

LECTURER : MAMOLIEHI MATSOBANE

Advantages Disadvantages

1. Previous period
1. Quick and easy to 2. inefficiencies are built
into the budget.
prepare.
3. Wastes resources.
2. Saves time and money.
4. Non value adding
3. Suitable for a stable activities are continued.
environment.
Rolling Budgeting (Continuous
Budgeting).
Rolling Budget
A budget continuously updated by adding a further
accounting period when the earlier period has expired.
It fits into the feed forward approach to performance
management.
It addresses changes in the environment that include
(Organisational changes, competitor challenges, new
technology of production processes, economic
environment changes, etc).
Rolling Budgeting (Continuous Budgeting).
Approaches:
There are two approaches to doing rolling budgets:
1. Add one more period on the budget if a single period expires. This
happens if the business environment is not very dynamic.
2. Revise all budgets and add one more period when a single period
expires. This will happen if the business environment is very
dynamic.
Rolling Budgets
Advantages Disadvantages
1. There is always a budget in
place for a longer period. 1. It is time, effort and
2. Planning and control will resource consuming.
improve as it will be based
on the most recent data. 2. Managers may regard
3. Regular assessment of it as a routine exercise.
budget makes managers
pay attention to the 3. Revision of standards
process. may lead to revision of
4. Uncertainty in planning is accounting data.
reduced as actual results
will be closer to budgeted
results.
Periodic Budget
• This type of budget shows the costs and revenue for one period of
time.
• It is then updated on a periodic basis. E.g, after every 12 months.
Zero Based Budgeting (ZBB)
An approach where budgets for each responsibility centre are prepared
from scratch. Expenditure must be justified to be included on the
budget.
In practice we start from the current levels of expenditure and trim
them down for the same activity levels.
Zero Based Budgeting (ZBB)
Steps in implementing ZBB:
1. Define Decision packages.
2. Evaluate and rank packages.
3. Allocate resources.
Zero Based Budgeting (ZBB)
A decision package =
is a document that describes a specific activity in terms of: purpose of
the activity, cost of the activity, alternative methods of doing the
activity, and the effect to the organization if the activity is not done.
This document is to be used by management in decision making/
budgeting.
Zero Based Budgeting (ZBB)

Advantages Disadvantages
1. Non-value adding operations 1. It is time, effort and resource
are improved. consuming.
2. Wasteful expenditure is 2. It may encourage short
avoided. termism.
3. It causes change and
encourages inquisitive thinking 3. Managers may need training in
in the organization. its application.
4. It leads to efficient allocation 4. The ranking process is difficult.
of resources.
The Participative Buudgeting
• This is the approach which allows all the budget holders to have the
opportunity to participate in setting their own budgets.
• It is sometimes called the bottom – up approach to budgeting.
Advantages and Disadvantages

Advantages Disadvantages
• Improved quality of forecasts • Extended and complex
• Improved motivation budgetary process
• Local conditions are included. • Slack may be built in to the
• Pooling skill and knowledge at budget.
different levels of management.
• Consumes time and other
• More realistic budgets are resources.
produced.
• Commitment to budgets is • If staff are not qualified it may
increased. lead to unachievable targets.
Imposed Budget
• This is the type of budget which is set without giving the ultimate
budget holders the opportunity to participate in the budget process.
• It is sometimes called the top – down budgeting.
Advantages and Disadvantages

Advantages Disadvantages
• Quick to prepare the budget as no • Lack of ownership of the budget
input from managers.
• Managers may not have the skill to • Lack of detailed knowledge of
participate usefully in the budget. each business area may result in
• Senior managers have a better overall in an unrealistic budget
view of the company and its
resources. • Low morale among staff.
• Strategic plans are incorporated.
• Input from inexperienced staff is
• Budget is perceived to be a
avoided. punishing tool.
• Saves time. • Local conditions are ignored.
Activity Based Budgeting (ABB)
ABB = the use of activity based costing philosophy and
approach in budgeting.
Implementation Steps:
1. Identification of activities and their levels.
2. Identifying cost drivers and calculating cost driver
rates.
3. Use cost driver rates to come up with a budget.
4. Use cost driver rates to calculate variances.
Activity Based Budgeting (ABB)

Advantages Disadvantages
1. Organisational strategies will 1. It is time, effort and cost
be included in the budget. consuming.
2. Non-value adding activities will 2. It is a complex system that may
be eliminated. not be understood by
3. Total Quality management will managers.
be improved.
Budgetary Control
• Budgets are first prepared
• Budgets are then executed
• Actual results are then compared with the budgets.
• The differences are calculated as Variances.
• Variances are investigated.
• Control measures are then put in place to correct the variances if
necessary.
Variance interpretation
• If costs are higher or revenues lower than the budget, the difference
is then called an adverse variance..
• If costs are lower or revenues are higher than thebudget, then the
difference is called a Favourable variance.
Budget centre
• This the section within an entity for which control may be exercised
through prepared budgets.
• Each budget centre is often a responsibility centre.
Four types of responsibility Centres are:
1. Cost Centre
2. Revenue Centre
3. Profit Centre
4. Investment Centre
Fixed vs. Flexible Budgets
Fixed Budgets
A budget that remains unchanged irrespective of the change in activity
level. It distorts the picture when comparing performance, as like is not
compered with like).

Flexible Budget
A budget that changes As volume of output changes. It is used for
performance measurement.
Flexible Budgets
Factors to consider when using a flexible budget:
1. Use of marginal costing principles.
2. Use of cost behaviour (Fixed costs, variable costs, semi-variable
costs, stepped costs).
3. Use of high - low method, scatter graph and linear regression.
Flexible Budgets
Flexible budgets are used in two different ways:
1. Do one Fixed Budget:
a) At the planning stage – prepare one fixed
budget.
b) At performance measurement stage – flex the
fixed budget to actual activity.
2. Do various Fixed Budgets:
a) At planning stage – Do various budgets.
b) At performance measurement stage – choose
the budget that matches the actual output.
Flexible Budget

Advantages Disadvantages
1. Useful for costs control. 1. In a modern business
2. Useful for activity control. environment, few costs are
variable.
3. Useful for performance
measurement.