Budgeting Techniques

  1. By: ranga weragoda

    A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units, organizations, activities or events in measurable terms. Budgets are important due to several reasons.

    1. To communicate plans to various responsibility center managers.
    2. To motivate managers to strive to achieve budget goals.
    3. To evaluate the performance of managers
    4. To provide visibility into the company's performance
    5. For accountability

    There are several methods that can be used to prepare budgets

    • ranga weragoda
      over 6 years ago

      1. Incremental Budgeting

      Incremental budgeting is budgeting based on slight changes from the preceding period's budgeted results or actual results. This is a common approach in businesses where management does not intend to spend a great deal of time formulating budgets, or where it does not perceive any great need to conduct a thorough re-evaluation of the business. This mindset typically occurs when there is not a great deal of competition in an industry, so that profits tend to be perpetuated from year to year.

      For advantages and disadvantages of incremental budgeting, please click here

    • ranga weragoda
      over 6 years ago

      2. Zero Based Budgeting

      Zero based budgeting requires the budget preparer to prepare the budget as it is the first time that budget is prepared. A zero-base budget requires managers to justify all of their budgeted expenditures, rather than the more common approach of only requiring justification for incremental changes to the budget or the actual results from the preceding year. A manager is theoretically assumed to have an expenditure base line of zero (hence the name of the budgeting method).

      The basic process flow under zero-base budgeting is:

      1. Identify business objectives
      2. Create and evaluate alternative methods for accomplishing each objective
      3. Evaluate alternative funding levels, depending on planned performance levels
      4. Set priorities

      For advantages and disadvantages of zero based budgeting, please click here

    • ranga weragoda
      over 6 years ago

      3. Rolling Budgets

      A rolling budget is continually updated to add a new budget period as the most recent budget period is completed. Thus, the rolling budget involves the incremental extension of the existing budget model. By doing so, a business always has a budget that extends one year into the future. This is also known as the continuous budgeting.

      A rolling budget calls for considerably more management attention than is the case when a company produces a one-year static budget, since some budgeting activities must now be repeated every month.

      For advantages and disadvantages of rolling budgets, please click here

    • ranga weragoda
      over 6 years ago

      4. Flexed Budgets

      A flexible budget includes formulas that adjust expenses based on changes in actual revenue or other activities. The result is a budget that is fairly closely aligned with actual results. This approach varies from the more common static, which contains nothing but fixed expense amounts that do not vary with actual revenue levels.

      In its simplest form, the flex budget uses percentages of revenue for certain expenses, rather than the usual fixed numbers. This allows for an infinite series of changes in budgeted expenses that are directly tied to actual revenue incurred. However, this approach ignores changes to other costs that do not change in accordance with small revenue variations. Consequently, a more sophisticated format will also incorporate changes to many additional expenses when certain larger revenue changes occur, thereby accounting for step. By incorporating these changes into the budget, a company will have a tool for comparing actual to budgeted performance at many levels of activity.

      For advantages and disadvantages of flexible budget, please click here

    • ranga weragoda
      over 6 years ago

      5. Activity Based Budgets

      Activity-based budgeting is a planning system under which costs are associated with activities, and budgeted expenditures are then compiled based on the expected activity level. This approach is quite different from the more traditional budgeting system, where existing cost levels are adjusted for inflation and major revenue changes in order to derive the annual budget.

      An activity-based budgeting system allows for a high degree of refinement in cost planning, and focuses attention on the volume and types of activities occurring within a business. A likely outcome of using this system is management planning to reduce the activity levels required to generate revenue, which in turn improves profits. It also means that managers are forced to have a detailed knowledge of company processes if they want to enhance the cost structure of a business.

      For advantages and disadvantages of Activity-based budgeting, please click here

    • administrator
      over 6 years ago

      Dear Ranga,

      Appreciate your valuable and good contribution. However if you could elaborate with some examples the readers will get benefited.

      Thx

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