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.