The purpose of this discussion question is to critically evaluate the two main methods for preparing

budgets – the activity-based approach and the zero-based approach. Both of these have been used in
both public sector and private sector organizations, with varying degrees of success.

Budgeting

According to Akhilesh Ganti (2020), a budget is an estimation of revenue and expenses over a specified
future period of time and is usually compiled and re-evaluated on a periodic basis. Budgets can be made
for a person, a group of people, a business, a government, or just about anything else that makes and
spends money.

Activity-based budgeting

Generally, Activity Based Budgeting is defined as: ‘a method of budgeting based on an activity
framework and utilizing cost driver data in the budget-setting and variance feedback processes .
[ CITATION ACC10 \l 1033 ]

Advantages of Activity-based budgeting

With reference to the above information, activity-based budgeting draws attention to the costs
of overhead activities which can be a large proportion of total operating costs [ CITATION Ter09 \l
1033 ].

Further, it recognizes that it is activities which drive costs. And if the causes of costs can be
controlled, then costs should be better managed and understood [ CITATION ACC10 \l 1033 ].
Not only that, according to ken (2000), activity-based budgeting can provide useful information
in a total quality management environment, by relating the cost of an activity to the level of
service provided.
Disadvantages of Activity-based budgeting.
Despite the advantages, activity-based budgeting is complicated and expensive to implement.
More suitable to large organizations with multiple products and many drivers
Another thing is that, many fixed costs do not vary with changes in the volume of drivers in the
short run, so activity-based costing my provide misleading information [ CITATION Col08 \l 1033 ]
Zero-based Approach
With zero-based budgeting, the budgeting process starts from a base of zero, with no reference being
made to the actual performance. All of the budget headings, therefore, literally start with a balance of
zero. Zero-based budgeting tries to achieve an optimal allocation of resources to the parts of the
business where they are most needed. It does this by forcing managers to justify every activity in their
department as they know that, until they do this, the budget for their department is zero [ CITATION
Kin19 \l 1033 ].

Advantages
Since zero-based budgeting does not make any reference to the actual performance, all of the activities
of the organization are re-evaluated annually from a zero base. Most importantly therefore, inefficient
and obsolete activities are removed, and wasteful spending is curbed[ CITATION Kim16 \l 1033 ].

In addition, zero-based budgeting by its nature encourages a bottom-up approach to budgeting in order
for it to be used in practice. This should encourage motivation of employees and a questioning attitude
among managers[ CITATION Col08 \l 1033 ].

Further, zero-based budgeting responds to changes in the business environment from one year to the
next which encourages efficient allocation of resources[ CITATION ACC10 \l 1033 ].

Disadvantages

Since decisions are made at budget time, managers may feel unable to react to changes that occur
during the year. This could have a detrimental effect on the business if it fails to react to emerging
opportunities and threats[ CITATION Col08 \l 1033 ].

Further, in a large organization, the number of activities will be so large that the amount of paperwork
generated from ZBB will be unmanageable. Which in turn will need training for this and training takes
time and money[ CITATION Ter09 \l 1033 ].

Conclusion