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Budgeting Techniques and Globalisation

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1.0 Introduction A budget is a quantitative of action plan or plan of action for the forthcoming period and also referred as forecasted financial statement or pro-forma financial statement (Das 2001). It is prepared for responsibility centres (may be a department or activity) (Das 2001). Das (2001) asserts that budgets are assigned to individuals and they are responsible and answerable for matters under their control. According to Das (2001), budgeting can be prepared in the following steps: 1. to set or to ascertain the objectives: the objective of the business have to be set so that the plans may be prepared to achieve those objectives; 2. to compile forecast: the forecast must be coordinated to become part of an overall plan. Forecasting requires gathering of information, and knowledge about the business and the external environment and the use of statistical techniques to prepare accurate estimates; 3. to consider limiting factors: decisions must be taken to minimize the effects or to amend them. The limiting factors must be kept in mind when determining the quantity which can be made or sold. The quantity determined must comply with the forecast and meet the objectives of the business. The plan is then made; 4. to prepare budgets: Budgets have to be coordinated with each other so that there are integration of plans, improved communication and operational harmony among functions and departments. All these will enable the organization's objectives to be achieved most efficiently; 5. to review forecast and plans: forecasts and budgets have to be reviewed at regular intervals. Changing environment may require changes to be made. Revised budgets may have to be prepared; and 6. to implement the budget: budgets that are accepted must be implemented. The budget becomes the standard by which performance is measured. Das (2001) states that the purposes of budgeting are to: - Compel planning: management is forced to set targets to give direction to operations, to anticipate problems and to be ready for changes; - Communication: Expectations of all plans are passed to individuals through communication. ...read more.


Both zero base budgeting and activity based budgeting require managers to perform critical assessment of the various tasks and activities carried out within an organization in order to determine whether or not they should be continued. Both budgets must be justified each new period and not only to justify increases over the previous year budget and what has been already spent is automatically sanctioned. In activity based budgeting, different activity levels can be used to provide the foundation or base and incremental decision packages (descriptions of specific organizational activities), which are used in ZBB to rank activities on order of priority against other activities. The reviews of activity based budgeting and zero base budgeting are carried out frequently. Both of the budgets are time consuming and costly to justify on an annual basis. It is worth nothing that some writers treat activity based as more of a philosophy than a technique attribute to all the good features of a number of new or not so new ideas including zero base budgeting. 3.2 Differences between Zero Base Budgeting and Activity Based Budgeting Activity based budgeting considers all of an organization's activities whereas zero base budgeting tends to focus on discretionary costs such as advertising and training. Zero base budgeting starts the budget with a zero base in a new period and it allows no activities or functions to be included in the budget unless managers can justify their needs while activity based budgeting starts with the budgeted output and segregates costs required for the homogeneous cost pools (Blocher 2008). Every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases. Zero base budgeting requires the budget request justified in complete detail by each division manager starting from the Zero-base. The Zero-base is indifferent to whether the total budget is increasing or decreasing. Besides that, zero base budgeting allocates resources based on needs and benefits while activity based budgeting allocates resources based on 4.0 Traditional Budgeting vs. ...read more.


According to Luecke (2004) people who are closest to the line services can make a good budget decision since they are familiar with all the functions and needs and participants in participative budgeting are more likely to make extra effort to achieve the budgeted goals. 4.2.2 Disadvantages of Participative Budgeting According to (http://www.principlesofaccounting.com/chapter%2021.htm) on the negative side of the equation, a bottom-up approach is generally more time consuming and expensive to develop and administer. It also reviewed that this occurs because of the iterative process needed for its development and coordination and another potential shortcoming has to do with the fact that some managers may try to pad their budget, giving them more room for mistakes and inefficiency. 5.0 Conclusion Activity based budgeting and zero base budgeting reverse the techniques of traditional budgeting which emphasizes on increases or make adjustment for the inflation of that new period. Activity based costing and zero base budgeting require managers to perform critical assessment of the various tasks and activities carried out within the organization in order to make a good budget. Although zero base budgeting and activity based budgeting are well accepted by the modern business world, it still has some weaknesses that can not be avoided such as time consuming and costly. We can see that, activity based budgeting and zero base budgeting is leaning towards participative budget but to make a good budget it still has to depend on many factors such as the size of the organization and etcetera. Tradition budgeting has got a lot criticism from the modern business world but still it is preferred by some of the organization which shows that a good budget may have the combination of traditional budgeting and participative budgeting. The advantages and disadvantages of participative budgeting and traditional budgeting reflect the weaknesses of traditional budgeting can be covered by using participative budgeting and vice versa. ?? ?? ?? ?? 1 ...read more.

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