traditional budgeting and beyond budgeting Flashcards
what is incremental budgeting
a method where the previous years budget is used as a base with adjustments made for the new year
what are some criticisms of incremental budgeting
- inefficiency –> promotes a use it or lose it mentality
- lack of innovation
- inflexibility –> doesn’t accommodate new prioties or sudden changes
- short term focus
- resource misallocation - can result in disproportionate allocation of resources
what are some advantages of incremental budgeting
- simplicity
- stability
- minimal disruption
- time efficiency
- focus on operational needs
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what are some examples of where incremental budgeting may be appropriate
– government departments and service providers
– large corporations with stable operation
– non profit organisations
– educational institutions
what is zero b based budgeting
starts from a zero base each period; every function is analysed for its needs and costs
– the logic of ZBB processes is to eliminate waste by ensuring that budgets include cost/use of resources only if they are justified each year
what are some advantages of ZBB
biggest advantage is the expected cost savings
- there is an expectation that ZBB can eliminate redundant expenditure and align spending with organisational goals
what are some challenges with ZBB
time consuming and requires detailed analysis
examples where ZBB might be appropriate
- organisations facing financial constraints
- start ups and new ventures
- public sector agencies
- project based organisations
what is the zero based budgeting process
- define decision packages
- evaluate and rank each package
- allocate resources
- review and re-evaluate
what is activity based budgeting
a budgeting system where costs are planned based on the activities needed to make and deliver the organisations goods and services
budgeting equivalent to activity based costing
advantages of activity based budgeting
provides a clear understanding of cost drivers and improves resource allocation
challenges of activity based budgeting
complex to implement and maintain. the relationship between costs and their cost drivers can often be misunderstood and exaggerated, meaning that budgets can be difficult to agree and use as control mechanisms
what are rolling budgets
A budget that is continuously updated so there is always a certain number of budget periods planned out. This is usually 12 months or 4 quarters of budget.
As each month or quarter is completed, a new month or quarter is added to the budget.
This can be operated alongside a fixed budget, or it can be a replacement for the fixed budget
what are advantages of rolling budgets
provides a more flexible and adaptive approach to budgeting, allows for continuous planning, and keeps the budget aligned with current business conditions.
what are challenges of rolling budgets
requires regular updates and monitoring, which can be time consuming
examples of where rolling budgets may be appropriate
dynamic and fast paced industries
seasonal businesses
project based organisations
definition of beyond budgeting
a management approach that moves beyond traditional budgeting to a more adaptive and decentralised process
Principles of beyond budgeting
Decentralisation: Shift decision-making to frontline managers.
Dynamic Planning: Flexible plans that adapt to changing conditions.
Relative Performance Contracts: Focus on relative performance
benchmarks rather than fixed targets.
advantages of beyond budgeting
Agility: Allows organisations to respond quickly to changes. Empowerment: Empowers managers with greater autonomy and
responsibility.
Innovation: Encourages continuous improvement and innovation.
challenges of beyond budgeting
Cultural Shift: Requires significant change in organisational culture.
Implementation Complexity: Needs strong leadership and commitment for successful adoption.
examples where beyond budgeting may be appropriate
innovation companies
organisations in dynamic markets
agile businesses
