Budgetary systems
- Created by: missamy11211
- Created on: 24-04-21 12:56
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- Budgeting systems
- Incremental budgeting
- system where we take last years budget and adjust it for changes (market growth, inflation). - we add an increment for the next upcoming period
- Advantages
- easy enough to understand - usually just adding a %
- same across all departments so no conflict
- budget is stable and gradual changes are easier for staff to cope with
- Disadvantages
- allows for budgetary slack - no incentive to reduce costs as assumed increase %
- encourages departments to spend in full- increases inefficieny
- assumes all activities of business will stay same yr to yr - irrelevant budgets
- Zero based budgeting (ZBB)
- budget that starts at 0 every year and takes nothing for granted - all expenses are justified
- opposite to incremental budgeting
- Advantages
- drives cost managers to look at more cost effective ways of buying and speeding up production
- staff feel more involved - positive morale
- efficient - all costs in the budget are justified
- Disadvantages
- time consuming to do - budget examination every year
- department managers may start to get frustrated at justification every year
- managers have to be trained in ZBB
- all managers have to be involved with this - hard to administer
- budget that starts at 0 every year and takes nothing for granted - all expenses are justified
- Rolling budgets
- way of amending the budget to account for developing circumstances in the marketplace
- e.g. economy going down can be accounted for in rolling budget by adjusting sales number
- budget can be rolled forward too to cover a new period, e.g. jan 16 can roll forward to cover feb16-jan17. rolling
- Advantages
- lengthy time horizon means should be no unexpected surprises
- encourages staff to look at what variables they can change
- in times of uncertainty around prices we can keep up to date as a control method
- Disadvantages
- can give staff a lack of goals to aim to as constantly changing
- what budget do we compare to at the end of the year? actual budget, rolling budge?
- too much time and effort required
- way of amending the budget to account for developing circumstances in the marketplace
- Incremental budgeting
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