Recent trends in budgeting:
1. Zero Base Budgeting (ZBB): According to the official CIMA terminology, zero base budgeting is, “ a method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero” . Under ZBB the programmes and activities get evaluated and ranked from zero base as if these were launched for first time. In this technique of budgeting the unwanted projects and activities get dropped and wanted and desirable activities and projects get included in the budget.
a. It starts from zero
b. All activities are identified in appropriate decision packages
c. All programmes are considered totally afresh
d. A detailed cost benefit analysis of each programme is undertaken
e. There is an officer responsible for each decision packages
f. Priorities are established and decision packages are ranked
Advantages of ZBB
Difference between Traditional budgeting and ZBB
|1. Begins with previous year’s budget||1. Begins with zero a based|
|2. Focuses on money||2. Focuses on goals and objectives|
|3. Produces a single level of expenditure for an activity||3. Produces alternative level of expenditure and desired result|
|4. Resources are allocated not on the basis of cost benefit analysis||4. Resources are allocated on the basis of cost benefit analysis|
|5. Prepared annually||5. Prepared once in every five years|
Performance budgeting: - Performance oriented budgets are established in such a manner that each item of expenditure related to a specific responsibility centre is closely linked with the performance of that centre. The following matters will be specified very clearly in such budgeting
Advantages of performance budgeting:
I. ABC Company Ltd .has given the following particulars. You are required to prepare a Cash budget for the three months ending 31st Dec. 2010.
Credit items are:-
1. Debtors/Sales – 10% sales are on cash basis, 50% of the credit sales are collected next month and the balance in the following month.
2. Creditors - - Materials 2 months
--Wages 1/5 month
-- Overhead ½ month
3. Cash balance on 1st October 2010 is expected to be Rs. 8,000
4. A machinery will be installed in August, 2010 at a cost of Rs. 1,00,000. The monthly Installment of Rs. 5,000 is payable from October onwards.
5. Dividend at 10% on preference share capital of Rs. 3,00,000 will be paid on 1 st December ,2010
6. Advance to be received for sale of vehicles Rs. 20,000 in December
7. Income tax (advance) to be paid in December Rs. 5,000.