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Both are different approaches to budgeting and both are applicable to costs that contain a discretionary element. The Zero Based Budgeting is a method where all expenses have to be justified for every new period. The ZBB commences from a Zero base. In Zero Based Budgeting, all functions in an organisation are analysed for its needs and costs. After the analysis, the budget would be centred on the needs for the upcoming period. While doing this, it does not take into account whether the budget is higher or lower than the previous one. ZBB can also be termed as a re-evaluation of the program and expenditures of an organisation. When approaching the budget from Zero, the managers of an organisation have to take into account two types of alternatives: 1. various ways of carrying out the same activities and (2) various levels of effort in carrying out the activities. ZBB is known to be more time- consuming than the other traditional budgeting. The Activity Based Budgeting helps in developing accurate budgets for organisations. The Activity Based Budgeting is a budgeting method where all the activities that invite cost in all functional areas in an organisation are recorded and the relationship between them is analysed. The Activity Based Budgeting aligns all activities with the objectives. The Activity Based Budgeting also streamlines the costs and helps in improving business practices. The ABB helps in effective analysiss of the profit potential of an organisationâ¼s services and its products. The Activity Based Budgeting also helps in cost effectiveness by comparing the various activities of an organisation and by consolidating certain functions. Summary 1. The Zero Based Budgeting is a method where all expenses have to be justified for every new period.
3. The Activity Based Budgeting is a budgeting method where all the activities that invite cost in all functional areas in an organisation are recorded and the relationship between them is analysed. ZBB can also be termed as a re-evaluation of the program and expenditures of an organisation.2. 6. 4. 5. . The Activity Based Budgeting aligns all activities with the objectives. In Zero Based Budgeting. all functions in an organisation are analysed for its needs and costs. The ABB helps in effective analysis of the profit potential of an organisationâ¼s services and its products.
cost trends of the last several years are projected forward but with adjustments both for inflation and for projected growth or decline in business activity. using established trends in sales growth. Historical sales patterns. resource allocation as needed (rather than based on annual allocations and plans). are projected. the operation must justify and document every item of expenditure and income anew. which in turn stifles innovation. The Beyond Budgeting Round Table (BBRT) has been one of their most vociferous critics. Brand-new operations will utilize zero-based methods. . the kind of planning most companies still practice: forecasting based on probabilities. continuous planning and controls (rather than an annual budget process). The planning activity is to determine exactly what activities will be carried out using the allocated funds. Zero-based budgeting is the creation of a completely new budget from the ground up²as if no history existed. if anything. according to its critics. new sales from planned new product introductions are then added. If inflation is high. "Budgets have long had a bad press. Peter Drucker. formal budgeting has also come under fire for impeding trust and empowerment. wrote in The Wall Street Journal: "Uncertainty²in the economy. the reality of terrorism. performance budgeting is used as a third alternative. that the necessary conditions of trust and empowerment in today's organizations are not possible with budgets still in place. the famous guru of management. society. high performance standards (rather than detailed rules and budgets). BBRT advocates a set of principles which include. the budget is fixed at the outset. In government planning. Business planning is usually a combination of the two. the threat of global warming. and freedom of action by small front-line teams (rather than direct control of operations from the center). When using this method. Under this method. if not counterproductive. the Round Table has 29 major corporate members." Uncertainty has." Innovation is vital for economic survival. On its homepage. because the entire system perpetuates central command and control." The BBRT is an element of The Player Group. As David Marginson and Stuart Ogden recently wrote in Financial Management (UK). politics²has become so great as to render futile. and worldwide epidemics. It argues. among others.The two dominant forms of budgeting are traditional and zero-based. CRITIQUES OF THE PROCESS As early as 1992. The advertising function then uses performance budgeting to allocate the budget to various products and media. But "budgeting stifles trust and empowerment. a management advisory firm. pressures on hydrocarbon fuels. Performance budgeting is sometimes used in the corporate setting when the advertising budget is arbitrarily set as such-and-such a percent to projected sales. grown since 1992 with the expansion of the Internet. but they have attracted even more flak recently for being at best inappropriate to modern business practice and at worst potentially harmful«. for instance. for example. two new concepts in the evolving corporate culture. but only very rarely in business. Traditional budgeting is based on a review of historical performance and then the projection of such findings to the future with modifications. as well as for stifling innovation. In addition to uncertainty.
performance of the operation over the last 12 months is evaluated on an on-going basis. the balance of opinion has swung decidedly in favor of the 'very dissatisfied.' Even within the financial management community. finding the budgeting process too 'unreliable' and 'cumbersome. In a new book titled Beyond Budgeting. as they evolve. citing Herman Heyns of Accenture/Cranfield School of Management: "[T]the budget process is obsolete given today's economy. projections for the next three months are generated every month. quite frankly. of little predictive value. traditional budgeting. in essence. and valuable tool practiced. resulting in documents that are time-consuming to produce. Jeremy Hope and Robert Fraser start off by sketching the ambivalence felt by top and middle management toward formal. Under a rolling budget.'" The changes. An article in The Practical Accountant put the matter as follows. subject to gamesmanship and. For the small business owner.The high costs of the budget process and its poor adaptability to stock market perceptions is another force working to bring about change in the budgetary process as it has been practiced over the last 50 years or so. Budgeting appears to be on the cusp of a change. out of date by the time they're implemented. necessary. eyeing the future." Among the new approaches advocated by Heyns is therolling budget. budgeting in the traditional sense will continue to be a sensible. Then they go on: "Though this ambivalence toward budgeting has existed for decades. nine of ten have expressed their dissatisfaction. How long it will take to transform itself is difficult to predict. will impact large corporations first and foremost. and making rational allocations for the immediate future. by examining current resources. .
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