Describe two methods of Alternative approach to Budgeting

(a) Incremental budgeting
Incremental budgeting is used to describe an incremental cost approach to budgeting where the budget of next period is based on the current period results plus an extra amount (an increment) for estimated growth or inflation next year. Incremental budgeting is effective only if current operations are effective, efficient and economical within any alternative course of action available to the organisation.

Although incremental budget is easy to prepare it encourages tax and wasteful spending to into the budget and because a normal feature of actual feature spending. It does not encourage performance to be improved or alternative approaches of carrying out production to be looked at.


Incremental budgeting is mainly used in budgeting for non-discretionary expenditure such as labour, materials and production overheads.

(b) Zero-based Budgeting (ZBB)
Budgetary from zero base
For discretionary expenditure e.g R and D
The principle behind ZBB is that each budget for each centre should be made from scratch or from a zero-base. It starts with a basic assumption that budget for next year is zero and therefore every process and expenditure must be justified fastly before being included in the budget for next period. ZBB is mainly used in budget for discretionary costs such as advertising and R & D.

In ZBB there is a positive attempt to eliminate inefficiencies and slacks from the current expenditure. The basic approach to ZBB has five steps. These are

Step 1: Managers within the organisation are asked to specify their decision units.

A decision unit is a program of work or capital expenditure or an area of activity which can be individually evaluated.

Step II. Each of the separate activities or decision units is then described in a decision package.

A decision package is a document which identifies and describes the specific activities in such a way that management can evaluate it and rank it in order of priority against other activities.

Step III. Each activity or decision package is evaluated and ranked by cost-benefit analysis

Step IV. Activities which cost more than their worth both in qualitative and quantitative tems should be droptial ( Cost-benefit analysis)

Step V: Resources are then allocated according to availability of funds and evaluation and ranking of competing decision packages

Zero-based budgeting is also known as priority-based budgeting
Focuses on programme of activities rather than functional departments based on line- items which is a feature of traditional budgeting.
Decision packages are identified for each decision unit. Decision units represent separate programmes or groups of activities that an organisation undertakes

Benefits of ZBB over traditional methods
1. It avoids the deficiencies of incremental budgeting, and represents a more towards the allocation of resources by need or benefit. Thus the level of funding is not taken for granted.
2. ZBB creates a questioning attitude rather than one that assumes that current practice represents value for money.
3. ZBB focuses attention on outputs in relation to value for money.
4. Effect allocation of resources.

Disadvantages

1. Too costly and time consuming
2. Lack of insufficient information could result in very poor estimation
3. Difficult to determine performance measures
4. The process is different to follow and managers do not support it

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Titany answered the question on October 12, 2021 at 08:34