2. Incremental Budgeting
• Starts with previous period’s budget or actual results.
• Add/subtract an incremental amount to cover
any known changes to the business
inflation.
• Only the increment needs to be justified.
• May be appropriate for stable business with good cost
control
3. Incremental Budgeting
Advantages Disadvantages
• Inefficiencies may be
compounded
example budget slack.
• Budget holder might spend
to the limit of the budget
just to ensure future budget
not cut – dysfunctional
behavior.
• Quick.
• Easy.
• Cost effective.
• Assuming historic figures
are acceptable, only increment
need be justified.
4. Zero based budgeting (ZBB)
Managers justify all income and expenditure items for each budgeting cycle.
• Starts with assumption that the budget for next period is zero.
• Budget holder prepares a “decision package” for the department which includes:
-function of department
-goal of department
-measure of performance
-level of funding required and justification
-consequences to the company of the department not performing its function.
• Senior management rank decision packages.
• Resources allocated to departments according to ranking
5. Zero based budgeting (ZBB)
Advantages
• Justification of entire
budget rather than just
increment.
• Efficient allocation of
resources
• Identifies unnecessary
expenditure.
• Useful for discretionary cost
centers
Example: research and
development
Disadvantages
• Time consuming and
expensive.
• Budget holders may feel
threatened as their
existence is being
questioned.
• An inefficient way to
confirm that resources are
required on a recurring
basis
6. Activity based budgeting (ABB)
• Follows principles of activity based costing (ABC).
• Budgets are prepared for each activity within a
department, rather than for the whole department.
• Cost drivers are identified for each activity.
Major benefits:
• May identify non-value added activities which can be
estimated.
• If incidence of cost drivers can be reduced then cost
savings can be made.
8. 1. Specification and communication of
organizational objective
2. Determination of key success factor
3. Establishment of clear lines of authority
and responsibility
4. Establishment of budget centers
5. Determination of budget period
6. Establishment of budget committee
7. Appointment of budget controller
8. Preparation of budget manual