Types Of Budgets

• Fixed or static budget:

Fixed or static budget is the budget if single level of some measure
of activity. Sales and costs estimated for the coming year are
compared with actual results.
When a company’s activities can be estimated within close limits,
the static budget seems satisfactory. The term static budget is
actually misleading, since it is also subject to revision.
Fixed merely represents that the budget is not adjusted to actual
volumes attained. It represents a prefixed point with which actual
results are compared.
Budgets are based on certain definite assumed conditions and
results. The purpose of fixed budget is to provide a basis for
planning, coordination and control.

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 Types Of Budgets
• Flexible Budget:
Flexible budget consists of several budgets or a range of
budgets based on some measures of activity.
A budget which is designed to change accordance with the
level of activity actually attained.
If the determination of the precise level of activity in advance
of actual operation is not possible, flexible could be usefully
employed.
The flexible budget sets out a series of alternative budgets for
various possible level of activity.
It can be used to show the costs and profits associated with
difference levels of output, to help management choose to
optimal output level.

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 Types Of Budgets
• Continuous, rollover or extended Budget:
• A budget period of one year is divided into four quarters or
twelve months and budgets are prepared in those smaller
periods then actual performance in each such period is
compared with budgeted performance.
• If comparison reveals that actual results too much far from
budgeted result causes are due to some unavoidable factors
, then the remaining periods budget is adjusted by dropping
the first quarter and next year’s first quarter is added so that
full year budget is readily available.
• Care must be taken that revision shall only be allowed for
the uncontrollable and unavoidable factors like Government
policies etc.

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 Budget factor
• Budget factor is also known as limiting factor,
It is defined “ the factor the extent of whose
influence must first be assessed in order to:
• ensure that the functional budgets are
capable of fulfillment .
Examples:
• Sales, materials, labor hours, machine hours,
plant capacity.

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 Budget padding
• Budget padding means under estimating
revenues
• And Over estimating costs
• Conservative estimates are provided
• Easily achievable targets

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 Budgetary slack
• The difference between the revenue or cost
projection that a person provides and a
realistic estimate of revenue or cost.

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 Why people pad budget
• People often perceive that performance will
look better in their superior’s eyes if they can
“beat the budget.”
• Budgetary slack often is used to cope with
uncertainty.
• Some unforeseen events during budgetary
period could result in unanticipated costs like
machine breakdown.

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 Use of budget
• Planning
• Control
• Communication
• Co-0rdination of activities
• Authorization
• Evaluation
• Motivation

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Human problems of budgetary control
• Imposed budgets
• The problem of slack
• The” if we don’t spend, we will lose it, syndrome
• Long or short term objectives
• Co-operation or competition
• Accurate scoring keeping

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 Conclusion

• Budgeting is planning requires thoughtful

analysis.
• Control is the purpose for which budgeting
provides means.
• Acceptance by the entire management team
and employees is necessary for successful
budgeting.

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 Conclusion

• When sharp tools are used for wrong purpose

or when their use is not understood, they
become dangerous weapons. This true for
budget tool.
• Too much is expected of it too soon.
• Management team pay only lip service to it.

• Source: Managing the industrial concern

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 Beyond budgeting
• Problems with budgeting
• Budgeting prevents rapid response
• Budgeting too detailed and expensive
• Budgeting is out-of-date within few months
• Budgeting is out-of- kilter with the competitive
environment
• Budgeting is divorced from strategy
• Budgeting stifles initiative and innovation
• Budgeting protects non-value-adding costs
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 Budgeting problems
• Budgeting reinforces command and control
• Budgeting demotivates people
• Budgeting encourages unethical behavior and
increase reputational risk

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 What is beyond budgeting
• Beyond budgeting is about rethinking how we
manage organizations in a post industrial world
where innovative management models
represents the only sustainable competitive
advantage.
• It is also about releasing people from the burdens
of stifling bureaucracy and suffocating control
systems, trusting them with information and give
them time to think, reflect, share, learn and
improve.

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 principles
• Governance and transparency
• Accountable team
• Goals and reward planning and control

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 Vision for change
• Responds rapidly to threats and opportunities
• Attracts and keeps the best people
• Enables and encourages continuous
innovation
• Drives operational excellence
• Leads to loyal profitable customers
• Support goal governance and ethical behavior
• Leads to sustained value creation

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 Benefits
• Faster response-speed and simplicity
• Innovative strategies-people work with in
open and self managed environment
• Lower costs
• More loyal customers

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 Zero Based Budgeting(ZBB)/ Priority
Based Budgeting
Zero Based Budgeting is technique whereby every item of expenditure in the budget is
fully justified, i.e. we start from scratch or zero.
No budget allocation to anyone unless it is justified. Past year’s performance is not
the criteria for current years budget. Each Activity is analyzed and justified.
The application of ZBB;
1. Each separate activity of the organization is identified and called a decision
package.
2. The existence of every decision package must be justified.
3. If justified, then the minimum effort required to sustain each package is costed.
4. Alternative for each package are considered in order to select the best options
for package.
5. Incremental packages are justified and costed as above.
6. Managers rank their decision packages in order or priority for resource allocation
7. Resources are allocated.

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 Advantages & of ZBB
• It identifies and eliminates wastages.
• It ensures that best possible methods of performing jobs are used, and that new ideas are
generated.
• It should result in more efficient allocation of resources.
• It increases communication with in organization.
• It involves participation of management should therefore motivate.
• The documentation of decision packages provides management with a deep, coordinated
knowledge of all the firm’s activities.
• It makes managers more aware of the costs of input, and helps them to identify priorities.
• Disadvantages Of ZBB :
• The costs of preparing the a vast number of decision package in large firms are very high.
• A large number of additional paper work is needed.
• Managers feel threatened by it.
• The ranking of decision packages and allocation of resources is subjective to a certain degree
and can give rise to departmental conflict.
• Despite increased participation a large volume of information travels one-way-downwards.

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