Budget Types

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.