Impact of Activity Based Budgeting and Zero Based Budgeting on Budgeting Process

THE ROBERT GORDON UNIVERSITY

ABERDEEN BUSINESS SCHOOL

Impact of Activity Based Budgeting

 And Zero Based Budgeting on budgeting process.

Student ID 0712661

2016

World Count 1366

TABLE OF CONTENTS

                                                                                Page

Introduction                                                                 3  

Zero Based Budgeting                                                   5

Activity Based Budgeting                                               7

Conclusion                                                                   9

References                                                                  10        

Introduction  

Budgets are a significant element of the corporate ecosystem from the time when where introduced in the 1920s and since then are deemed to be the fundamental drivers and assessors of organisational performance, and the key components for planning and control (Simons, 1995; Armstrong et al., 1996; Ekholm and Wallin, 2000; Hansen et al., 2003; Goode and Malik, 2011; Hansen, 2011). Budgets are the extremely effective instrument of control for managers, and very handy procedure used in management accounting (Pietrzak, 2013). At the moment practically all firms depend on budgeting and budgetary techniques to accomplish strategic targets, but even with its common usage, it is far from ideal (Hansen et al., 2003).  

   The traditional budgeting has been critiqued by numerous researchers (Hope and Fraser, 1999; Gary, 2003; Max, 2005; Taylor et al., 2009). This criticism has shown that budgeting does not consider the business plan of the company. It was find that 60% of the companies fail to associate their budgets with the business plan of the organisation (Fraser, 2001).

    Regardless of integrative purpose and base for performance appraisal, budgets have several weaknesses such as: time-consuming; oblige responsiveness and are frequently an obstacle to modification; make personnel feel unappreciated; focus how to decrease costs instead of generate income; not adjusting to the varying business surroundings; do not adding lot value to the business; budgets are established on unverified guesses and assumptions; are only strong in relation to the vertical managing and command; make stronger walls among organisation divisions (Hansen et al., 2003).

Most academics propose that budgeting limitations may be reduced by using two styles, one is to give up the budgeting process and concentrate on the performance appraisal, other supports improving the budgeting process and mainly concentrates on the planning issues with budgets (Hope and Fraser, 1999; Libby and Lidsay, 2003; Hansen et al., 2003; Max, 2005; Pilkinngton and Growther, 2007).

This essay will focus on approach which is concentrated on “improving” the budgeting process by using Zero Based Budgeting (ZBB), and Activity Based Budgeting (ABB).

Zero Based Budgeting

In the mid-1940s when money was short after WW II, the issues with traditional budgeting started to grow, and led to impression that changes have to be made. To overpower the weaknesses of incremental budgets Zero Based Budgeting has been developed. ZBB as a model of budgeting was introduced in US by public sector in the 1960s, and first applied to the private sector by Texas Instruments in 1969. It instantly turn out to be one of the trendy management instruments of the 1970s (Pearson and Michael, 1981).

ZBB obliges executives to state all of their budgeted spending, a manager is hypothetically presumed to have an expenditure base line of (Tyer, 1977; Pearson and Michael, 1981; Hayes and Cron, 1988).

 In ZBB, organization sets up its budget from zero year by year, expecting managers to justify every pound they intend to spend. Traditional "incremental" budgeting, in opposite, uses the prior year's budget as an opening point, and executives should clarify only why they will spend more or less in this budgeting period this than previous. Zero-based budgeting is time-consuming, but it be able to create a broad range of advantages (Tyer, 1977; Pearson and Michael, 1981; Hayes and Cron, 1988).

The main benefit of zero-based budgeting is that it encourages efficiency. By imposing management to go back and state all plans as if they were new, ZBB inspires them to try to find the really efficient, best cost-effective solutions (Tyer, 1977; Pearson and Michael, 1981; Hayes and Cron, 1988).

Second benefit of ZBB is that method produces space for new assignments

With zero-based budgeting, new plans are on same level with existing ones and be able to compete for financing on a same basis. Supervisors of current projects will be enforced to defend of their own qualities (Tyer, 1977; Pearson and Michael, 1981; Hayes and Cron, 1988).

ZBB is focusing on the mission. A broad number of firm employ funds on assignments or divisions that don't add to earnings in any substantial way. ZBB allows the organization to assess whether it will be beneficial to close down these ventures, selling them off or, outsourcing them (Tyer, 1977; Pearson and Michael, 1981; Williams, 1981; Hayes and Cron, 1988).

       One of the major limitations of ZBB is that it may recompense short-term strategy by moving resources to sections of the firm that will create incomes in the next calendar year. ZBB requires a lot of resources. A lot more time is needed to prepare a budget from zero than alter an existing one. Additional, the ZBB method can be used by savvy superiors to have more resources in the units. It may steer to a transformation in culture where there is a reduced spirit of teamwork in the organization, as employees feel unneeded (Tyer, 1977; Pearson and Michael, 1981; Williams, 1981; Wetherbe and Montanari, 1981; Hayes and Cron, 1988).

Activity- Based Budgeting

The other approach to improving budgeting process is Activity-Based Budgeting (ABB). This technique of budgeting is established on an activity structure, using cost driver data in the budget preparation and variance feedback methods. The very basic method of ABB uses cost drivers (recognised during activity-based costing, ABC) to support preparation of the budget. ABB concentrates on activities rather than functions (Mak and Roush, 1996; Hansen et al., 2003; Stevens, 2004; Bengu, 2010).