Explain in details these budgeting approaches used in the preparation of budgets

1. Incremental budgeting
2. Zero based budgeting
3. Activity based budgeting
4. Output based (performance based) budgeting
5. Line item budgeting
6. Program based budgeting
1. Incremental Budgeting:
 Concept: This approach involves making small adjustments to the previous period's
budget to account for changes or growth. It assumes that most expenses will remain
constant with incremental changes.
 Process: The existing budget serves as a baseline, and adjustments are made based
on factors like inflation, changes in workload, or known variations in costs.
Merits:
Simple and Quick: Since it builds on the previous budget, it's relatively quick and
easy to prepare.
Stability: Provides stability as it maintains existing spending patterns.
Demerits:
Inefficiency: May perpetuate inefficiencies from previous budgets.
Limited Strategic Focus: Might not encourage a strategic review of all expenditures.

2. Zero-Based Budgeting (ZBB):

 Concept: ZBB requires justifying every expense from scratch, as if no previous
budget existed. Every budget item starts at zero, and each department must build its
budget based on needs and costs.
 Process: Involves a detailed review of all expenses, and each item must be justified.
This method encourages efficient resource allocation and is particularly useful for
identifying unnecessary costs.
Merits:
Efficiency: Promotes efficiency by requiring justification for every expense.
Strategic Alignment: Forces a thorough review, aligning budgets with current
organizational goals.
Demerits:
Time-Consuming: Requires significant time and effort to justify each expense.
Resistance: Can face resistance from departments accustomed to incremental
budgeting.
3. Activity-Based Budgeting (ABB):
 Concept: ABB links budgeting to specific activities within the organization. It
identifies the key activities that drive costs and allocates resources accordingly.
 Process: Focuses on the activities that consume resources and allocates budget
based on the expected level of activity. It helps in aligning budgeting with the
strategic goals of the organization.
Merits:
Resource Allocation: Efficiently allocates resources to activities that drive costs.
Strategic: Aligns budgeting with strategic objectives by focusing on key activities.
Demerits:
Complexity: Requires detailed analysis and can be complex to implement.

4. Output-Based (Performance-Based) Budgeting:

 Concept: This approach ties the budget directly to the output or results. It
emphasizes achieving specific performance targets and allocates resources based on
the expected outcomes.
 Process: Budgeting is determined by the desired results or performance metrics. It
aligns financial planning with organizational goals and outcomes.
Merits:
Results-Oriented: Directly ties budget to desired results, fostering a results-oriented
culture.
Accountability: Enhances accountability as budgeting is linked to performance
metrics.
Demerits:
Measurement Challenges: Defining and measuring performance can be challenging.
Subjectivity: Performance metrics may be subjective and lead to biases.
5. Line Item Budgeting:
 Concept: The most common and traditional approach, where the budget is prepared
based on individual line items or expense categories. Each line item is allocated a
specific amount of money.
 Process: Involves breaking down the budget into categories such as salaries, utilities,
supplies, etc. It provides a detailed overview of spending but may lack strategic
focus.
Merits:
Simplicity: Simple and easy to understand, providing a clear breakdown of expenses.
Historical Comparisons: Facilitates easy comparison with historical budgets.
Demerits:
 Lack of Flexibility: May lack flexibility as it doesn't easily adapt to changes in
priorities.
Limited Insight: Provides limited insight into the strategic priorities of the
organization.

6. Program-Based Budgeting:
 Concept: Focuses on the programs or activities of an organization. Resources are
allocated based on the goals and objectives of specific programs rather than
departments or line items.
 Process: The budget is structured around the various programs or projects of an
organization. It helps in aligning financial resources with the strategic priorities of
the organization.
Merits:
Strategic Focus: Aligns budgeting with strategic goals by focusing on programs.
Transparency: Provides transparency regarding resource allocation to specific
programs.
Demerits:
Complexity: Can be complex to implement and requires a clear understanding of
program costs.
Subjectivity: Program categorization may involve subjective judgment.
Each approach has its strengths and weaknesses, and the choice often depends on the organization's
goals, structure, and management philosophy.