Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 08 (Cont.) - Budgetary system - Coggle Diagram
Chapter 08 (Cont.) - Budgetary system
Incremental budget
A method of budgeting which next year budget is prepared by using current year's actual result as a starting point
Advantages:
Quickest and easiest budgeting method
Suitable for business in stable environment
Disadvantages:
Build in previous problems and inefficiencies
Managers may spend all their allowances
Uneconomic activities may be continue
Fixed and Flex Budget
Fixed budget:
Prepare on the estimation of production and sale
Budget is not revised to new level of activities
Flex budget:
Can be adjusted based on the actual results
Retrospectively
Zero based budgeting
Implementing ZBB: 1. Define decision packages (items and activities about which a decision will be made). Two types of decision package: Mutually exclusive packages (Alternative methods of getting the same job done) and Incremental packages (start with minimum and then add up) 2. Evaluate and rank each activity 3. Allocate resources
Involves preparing a budget for a cost center from a zero base
Advantages:
Remove inefficient or obsolete operations
Avoid wasteful expenditure
Increase motivation of staff
Respond to changes
Provides in-depth assessment of a business operation
Challenges the status quo
More efficient allocation of resources
Disadvantages:
Enormous extra volume of paperwork
Short-term benefits may be emphasized more than long-term
All decisions have to be made in the budget
Call for management skills, and managers have to be trained for ZBB
Org's info system may not be capable to provide suitable info
Ranking process may be difficult
Using ZBB in practice:
Not suitable for direct manufacturing costs
Best applied to support expenses (eg. marketing, finance, accounting, sales, distribution, etc.)
Can be applied to non-profit organizations and service industries
Activities Based Budgeting
Involves defining the activities that underlie financial figures to decide the allocation of resources
Principles of ABB:
Activities which drives costs -> Aim is to plan and control the causes of costs
Not all activities add value
Decisions beyond immediate control
Traditional methods unable to continuous ỉmprovement
Beyond Budgeting
Criticism:
Budgets are time-consuming and expensive
Budgets provides poor value to users
Budgets fail to focus on shareholder's value
Budgets are too rigid and prevent fast response
Budgets protect than reduce costs
Budg-ets prevent product and innovation
Budget focus on sales rather than customer satisfaction
Budgets are divorced from strategy
Budgets reinforce a dependency culture
Budgets leads to unethical behavior (eg. slack)
Concepts
Use adaptive process for making decision rather than tie decision making to conformity with rigid budget
Move towards devolved networks rather than centralized hierarchy
Rolling budget: is a budget that continuously updated by adding a further accounting period to the end of the budget when the corresponding budget period ends.