Different Type of Budgeting Technique
Budgeting lies at the foundation of every financial plan. It doesn’t matter if you’re living paycheck to paycheck or earning six-figures a year, you need to know where your money is going if you want to have a handle on your finances. Unlike what you might believe, budgeting isn’t all about restricting what you spend money on and cutting out all the fun in your life. It’s really about understanding how much money you have, where it goes, and then planning how to best allocate those funds. Here’s everything you need to help you create a budget using different approach.
(a)Incremental Budgeting
This is where the current budget and actual figures act as the starting point or base for the new budget. The base is adjusted for forecast changes to, for example, the product mix, sales volume, sales price, expenses and capital expenditure that are expected to occur over the next budget period. It is called incremental budgeting as the approach does not focus on the base, but focuses on the increment (the changes from the base). An example would include increasing last years operating expenses by the rate of inflation to calculate the new budgeted figure. The major disadvantage of this is that the major part of the expense (the base) does not change and in fact is overlooked and not questioned under this approach. For example the base figure may be distorted due to extraordinary events in the previous period which are not expected to reoccur. Thus if this is not taken into account, the budget could be misleading. Advantages of Incremental Budgeting Easy to implement If you are looking for a budget that is very simple to implement, incremental budgeting might be for you. You do not have to send your department managers to any special type of training in order to utilize this budgeting system. It is easy to learn and the process can be completed within a very short period of time.
Gradual Change
One of the benefits of incremental budgeting is that it allows gradual change
(a)Incremental Budgeting
This is where the current budget and actual figures act as the starting point or base for the new budget. The base is adjusted for forecast changes to, for example, the product mix, sales volume, sales price, expenses and capital expenditure that are expected to occur over the next budget period. It is called incremental budgeting as the approach does not focus on the base, but focuses on the increment (the changes from the base). An example would include increasing last years operating expenses by the rate of inflation to calculate the new budgeted figure. The major disadvantage of this is that the major part of the expense (the base) does not change and in fact is overlooked and not questioned under this approach. For example the base figure may be distorted due to extraordinary events in the previous period which are not expected to reoccur. Thus if this is not taken into account, the budget could be misleading. Advantages of Incremental Budgeting Easy to implement If you are looking for a budget that is very simple to implement, incremental budgeting might be for you. You do not have to send your department managers to any special type of training in order to utilize this budgeting system. It is easy to learn and the process can be completed within a very short period of time.
Gradual Change
One of the benefits of incremental budgeting is that it allows gradual change
References: * Brimson, J&Fraser, R.(1991), The Key Feature of ABB, 42-43 * Cantoria.c.s, (2011)Walking Through an Example of Creating a Zero-Based Budget * Gietzman, MB,(1992) The Development and Design of An Activity Based Budgeting System, Initial Experience. * Johnson, HT.(1988)Activity Based Infromation:A blue Print for World Class Management. 23-30 * Johnson, S.(2005), Beyond Budgeting, Retrieved from, http://www.acca.co.uk/students/acca/exams/p5/technical_articles/2950520 * Morrow, M & Connolly,T. (1991)The Emergence of Activity Based Costing. 38-43 * Randy Myer(2001), Budget on a Roll, Retrieved from http://www.journalofaccountancy.com/Issues/2001/Dec/BudgetsOnARoll.htm. * Rahman, K.A.(2011) The Pattern of Behaviour in Response to Budgeting. * Sargent,Charles W. PH.D.(1995), Zero-Base Budgeting and the library, http://www.ncbi.nlm.nih.gov/pmc/articles/PMC225295/pdf/mlab00085-0055.pdf