Budgeting

Question 1

Budgeting

Traditional
Continuing
ABC or ABB
Zero Base Budget

Answer 1

Activity-based budgeting (ABB) identifies resources that are needed to perform activities required to meet the budgeted production and sales volume. By comparing the amount of resources that are required to the amount of resources that are in place, upwards or downwards adjustments can be made during the budget setting process. Many firms that have adopted activity-based costing (ABC) have also implemented ABB.

Budgeting for non-profit-making organisations (NPO) normally begins with the expected costs of maintaining current ongoing activities and then adding any further costs considered desirable. Precise objectives are difficult to define for NPO’s and their accomplishments are difficult to measure. Budgets in NPO’s are therefore mainly concerned with the input of resources (expenditure) whereas budgets in profit organisations focus on the relationship between inputs (expenditure) and outputs (sales revenue). The traditional format for NPO’s is the line item budget where expenditures are expressed in considerable detail but activities undertaken are given little attention. These budgets fail to provide NPO’s with information relating to planned and actual accomplishments (activities). An improved budgeting approach for NPO’s is to rather group expenditure according to major activities/ programmes, similar to ABB. This ensures NPOs focus on activities/ programmes that will achieve their overall objectives and enables management to make more informed decisions about the allocation of resources to those activities.