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Budgeting has been known to be a planning and control tool to help management in their planning, decision-making and implementation and control of business activities to ensure goal congruence
Budgeting has been known to be a planning and control tool to help management in their planning, decision-making and implementation and control of business activities to ensure goal congruence.
Hayden, a newly recruited finance manager of a SMEE enterprise operating in the technology industry involved in much research and development of new technology for its products. In this industry, the consumer taste and patterns are constantly evolving and social media adoption had been prevalent amongst its competitors in recent years.
Hayden had been tasked by the CEO to investigate a better and more effective way of performing its budgeting exercise. The enterprise had been operating for the past decade, starting humbly as a small family business but has grown to its current size (turnover of $5 million each year). It had been adopting the traditional approach of incremental budgeting to-date. Hayden wonders about the following budgeting approaches and how they will be applicable in the context of SMEE enterprise.
Required:
(a) Define the following budgeting approaches (word count should be a minimum 150 words, not exceeding 250 words). :
i. incremental budgeting (3 marks)
ii. zero based budgeting (3 marks)
iii. rolling budgeting (3 marks)
Expert Solution
(a)
i.
Incremental budgeting, as evident from the name, is based on the assumption that the best approach to develop a budget is based on a previously developed budget. When this approach is used, the already available budget, usually for the current period is used as the base. Incremental percentages are used to establish the amount for the period for which the budget is being prepared. This approach is the considered to be the most conservative approach towards preparing a budget. It is the most simple method, so it is easy to prepare budget using this method. It also helps in eliminating any discrepancies because a consistent percentage is used based on consistent assumptions. On the other hand, the biggest shortcoming is that it may allocate unnecessary increase to certain expense items.
ii.
Zero based budgeting is totally opposite to incremental budeting because under this approach, the budget is prepared from scratch (or from ZERO as is clear from the name). The existing activities of the business as well as any new activity are first ranked based on importance to the organization. Then amounts are allocated to these.
The best part about this approach is that a reshuffling can be made and it must be properly justified. This budget is based on needs of each activity around each department. Any unnecessary activity that should not use up resources would not get any excess but allocation and ranking is quite complicated.
iii.
Rolling budget, which is also known by the name continuous budget, is the kind of budgeting technique under which no fixed budget is available. The budget is revised on a continuous basis throughout the period. It is much more accurate method of budgeting. It is very useful in tackling the dynamic aspects of a business. This year is the perfect example of using such technique. When Covid hit, many plans of all most all businesses went down the drain. In such unpredictable scenarios, Rolling budget is the best option.
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