Traditional Budgeting: Advantages and Disadvantages

Topics: Budget, Zero-based budgeting, Cost Pages: 4 (1197 words) Published: November 14, 2014
Define traditional budgeting
Traditional budget is a type of budget which uses the income and expenses from the previous year or month to predict the next month or year's budget. A traditional budget is easy to create since it is meant to predict a future period of finances in relation to the previous period. In most cases though, the traditional budget usually ends up being too rigid. Advantages of traditional budgeting

The budget is stable and change is gradual.
Managers can operate their departments on a consistent basis. The system is relatively simple to operate and easy to understand. Conflicts should be avoided if departments can be seen to be treated similarly. Co-ordination between budgets is easier to achieve.

The impact of change can be seen quickly.
Disadvantages of traditional budgeting
Assumes activities and methods of working will continue in the same way. No incentive for developing new ideas.
No incentives to reduce costs.
Encourages spending up to the budget so that the budget is maintained next year. The budget may become out of date and no longer relate to the level of activity or type of work being carried out. The priority for resources may have changed since the budgets were set originally. There may be budgetary slack built into the budget, which is never reviewed-managers might have overestimated their requirements in the past in order to obtain a budget which is easier to work to, and which will allow them to achieve favourable results.

Define zero-based budgeting
Zero based budgeting involves preparing a budget for each cost centre from a zero base. Every item of expenditure has then to be justified in its entirety in order to be included in next year’s...
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