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1) Identify The Five Budgeting Methods and Briefly Describe Each

The document identifies five budgeting methods: incremental budgeting, activity-based budgeting, value proposition budgeting, zero-based budgeting, and three levels of involvement in the budgeting process. Incremental budgeting takes last year's figures and adjusts them, while activity-based budgeting determines inputs needed to meet targets. Value proposition budgeting focuses on items that create value, and zero-based budgeting requires justifying all expenses from scratch each year. The levels of involvement are imposed, negotiated, and participative budgeting.

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109 views3 pages

1) Identify The Five Budgeting Methods and Briefly Describe Each

The document identifies five budgeting methods: incremental budgeting, activity-based budgeting, value proposition budgeting, zero-based budgeting, and three levels of involvement in the budgeting process. Incremental budgeting takes last year's figures and adjusts them, while activity-based budgeting determines inputs needed to meet targets. Value proposition budgeting focuses on items that create value, and zero-based budgeting requires justifying all expenses from scratch each year. The levels of involvement are imposed, negotiated, and participative budgeting.

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REDAPPLE MEDIA
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NANDINI BHARDWAJ

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1) IDENTIFY THE FIVE BUDGETING METHODS AND BRIEFLY
DESCRIBE EACH.
. Incremental budgeting

Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to
obtain the current year’s budget. It is the most common method of budgeting because it is
simple and easy to understand. Incremental budgeting is appropriate to use if the
primary cost drivers do not change from year to year. However, there are some problems
with using the method:

 It is likely to perpetuate inefficiencies. For example, if a manager knows that there is


an opportunity to grow his budget by 10% every year, he will simply take that
opportunity to attain a bigger budget, while not putting effort into seeking ways to cut
costs or economize.
 It is likely to result in budgetary slack. For example, a manager might overstate the
size of the budget that the team actually needs so it appears that the team is always
under budget.
 It is also likely to ignore external drivers of activity and performance. For example,
there is very high inflation in certain input costs. Incremental budgeting ignores any
external factors and simply assumes the cost will grow by, for example, 10% this
year.

2. Activity-based budgeting

Activity-based budgeting is a top-down budgeting approach that determines the amount of


inputs required to support the targets or outputs set by the company. For example, a company
sets an output target of $100 million in revenues. The company will need to first determine
the activities that need to be undertaken to meet the sales target, and then find out the costs of
carrying out these activities.

Value proposition budgeting

In value proposition budgeting, the budgeter considers the following questions:

 Why is this amount included in the budget?


 Does the item create value for customers, staff, or other stakeholders?
 Does the value of the item outweigh its cost? If not, then is there another reason why
the cost is justified?

Value proposition budgeting is really a mindset about making sure that everything that is
included in the budget delivers value for the business. Value proposition budgeting aims to
avoid unnecessary expenditures – although it is not as precisely aimed at that goal as our final
budgeting option, zero-based budgeting.

4. Zero-based budgeting
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As one of the most commonly used budgeting methods, zero-based budgeting starts with the
assumption that all department budgets are zero and must be rebuilt from scratch. Managers
must be able to justify every single expense. No expenditures are automatically “okayed”.
Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not
considered absolutely essential to the company’s successful (profitable) operation. This kind
of bottom-up budgeting can be a highly effective way to “shake things up”.

The zero-based approach is good to use when there is an urgent need for cost containment,
for example, in a situation where a company is going through a financial restructuring or a
major economic or market downturn that requires it to reduce the budget dramatically.

Zero-based budgeting is best suited for addressing discretionary costs rather than essential
operating costs. However, it can be an extremely time-consuming approach, so many
companies only use this approach occasionally.

Levels of Involvement in Budgeting Process


We want buy-in and acceptance from the entire organization in the budgeting process, but we
also want a well-defined budget and one that is not manipulated by people. There is always a
trade-off between goal congruence and involvement. The three themes outlined below need
to be taken into consideration with all types of budgets.

Imposed budgeting

Imposed budgeting is a top-down process where executives adhere to a goal that they set for
the company. Managers follow the goals and impose budget targets for activities and
costs. It can be effective if a company is in a turnaround situation where they need to meet
some difficult goals, but there might be very little goal congruence.

Negotiated budgeting

Negotiated budgeting is a combination of both top-down and bottom-up budgeting


methods. Executives may outline some of the targets they would like to hit, but at the same
time, there is shared responsibility for budget preparation between managers and employees.
This increased involvement in the budgeting process by lower-level employees may make it
easier to adhere to budget targets, as the employees feel like they have a more personal
interest in the success of the budget plan.

Participative budgeting

Participative budgeting is a roll-up approach where employees work from the bottom up to
recommend targets to the executives. The executives may provide some input, but they more
or less take the recommendations as given by department managers and other employees
(within reason, of course). Operations are treated as autonomous subsidiaries and are given a
lot of freedom to set up the budget.
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