What do you mean by Budgeting and Zero Base Budget ?

 

What Is Budget?

According to the chartered institute of management account London(CIMA) budget means “Qualitative expression of a plan for a defined period of time,that includes plant,sales volume, revenue, resource, quantities,cash flows” etc.

 

What Is Budgeting?

 

Whereas budgeting means the process of estimating future expenditure which is concerned with formulating plans, co-ordinating activities, controlling operation etc.

 

In other words budgeting means the technique of formulating a budget that enables the management body to anticipate various problems and put corrective measures to overcome the problems.

 

TYPES OF BUDGET

1.Sales Budget

The budget which is concerned with un prepared forecast avantis and values of sale so be achieved in a budget period is called sales budget.This budget provides a basis for all other budgets which is prepared by sales manager.He should be responsible for preparation and execution of this budget directly.It considers

 

i.Past sale figure and trends

ii.Seasonal fluctuations

iii.Orders in hand and plant capacity.

iv.Return on capital and competition.

 

2.Production Budget

The budget which is prepared to forecast total output to be produced in future at a prevailing situation is called production budget.Generally it is prepared by production manager after taking into consideration opening stock,estimated sales and closing stock etc.This budget normally expressed in aventative or financial units.The factors should be considered for preparation of production budget.They are:-

 

i.The stock of good to be maintained

ii.The level of production needed.

iii.The time log between production & sales.

 

3.Cost of Production Budget

The budget which is prepared to estimate cost of output planned for a budget period is called cost of production budget.Normally it is prepared by costing department after determining volume of output to be produced.It considers

 

i.Material to be required.

ii.Labour force to be employed.

iii.Overhead expenses expressed to be incurred.

 

4.Material Budget

The budget which is prepare to estimate materials to be required during a budget period in order to carry on production activities smoothly is called material budget.Generally it is prepared by purchased manager that always relates with production budget.The factors to be considered for  preparing  this budget are:-

 

i.Raw material expected to be required.

ii.The seasonal nature in the availability of raw material.

iii.The price trend in the market.

iv.The company’s stock policy.

 

5.Purchase Budget

The budget which is prepared for the estimation of materials to be purchased from the market during the budget period is called purchase budget.It is mainly depends on production budget & material requirment budget.Generally it is prepared by purchase manager after getting relevant information about capital items,tools, general suppliers,direct material requirement etc.It considers factor like:-

 

i.Level of over stocking and undertaking.

ii.Accumulation of stock.

iii.Estimated production.

 

6.Direct Labour Budget

The budget which is prepared to estimate the requirement of direct labour in order to meet production target during a budget period is called direct labour budget.Normally it is prepared by personal manager with an objective to enable personal department to carry out programme and carry on transport.It consider various factors like:-

 

i.Availbility of workers.

ii.expected changes in the labour force.

iii.Different classes of labour.

 

7.Manpower Budget

The budget which is prepared to estimate the requirement of both direct and indirect labour to meet the future requirement during a budget period is called manpower budget.Generally it is prepared by personal manager and expressed in terms of labour hours,grade of workers etc.The purpose of this budget are:-

 

i.Provide efficient personnel management.

ii.Make provision for suitable yardstick.

iii.Reduce labour turnover.

 

8.Manufacturing Overhead Budget

The budget which is prepared to estimate workers overhead expenses expected to be incurred in a budget period in order to achieve production target is called manufacturing overhead budget.Generally it is prepared by the production manager on the basis of figures available in the manufacturing overhead incurred.

 

i.Fixed Cost.

ii.Variable Cost.

iii.Semi-variable cost.

 

9.Administration Expenses Budget

The budget which is prepared to estimate the expenses to be incurred for ensuring effective managers activity is called administration expenses budget.Generally it is concerned with:-

 

i.Formulating policies

ii.Directing the organisation.

iii.Controlling business Operation.

 

10.Selling & Distribution Budget

The budget which is prepared to estimate the expenses to be incurred during a budget period to achieve targeted sales is called selling and distribution of projects.

 

11.Plant utilisation of Budget

The budget which is prepare to estimate the requirement of plant capacity to carry on the production during a budget period is called plant utilisation budget.Generally this budget is prepared by production manager whose main functions are:-

 

i.Show the machine load in each department.

ii.Indicate overloading of department.

iii.Identify the ideal capacity of the department.

 

12.Capital Expenditure Budget

The budget which is prepared to estimate the amount of capital required for acquiring fixed assets in order to achieve production target during a period is called capital expenditure budget.It is prepared by chief executive officers.It concerned with:-

 

i.Available production Capacities.

ii.Re-allocation of existing assets.

iii.Possible improvement in production.

 

13.Research and Development Cost Budget

The budget which is prepared to estimate the cost expected to be incurred in order to carry on research work during a budget period is called research and development cost budget.Generally  this budget is prepared by brand and for a long period stay 10 years.

 

14.Cash Budget

The budget which is prepared to estimate the expected receipts and payments of cash during a budget period is called cash budget.It aims at effective cash management and ensures available of minimum cash balance at all times.Generally it is prepared by finance manager and chief accountant for the guidance of cash flows of the organisation.Its main purpose are :-

 

i.Review the cash flow.

ii.To estimate availability of cash.

iii.To pinpoint the period of excess cash.

 

15.Master Budget

The budget reflects the summary of various functional budget is called master budget.Generally it is prepared by the budget committee on the basis of coordinated functional budgets.Normally it aims at:-

 

i.Providing summary of all budgets.

ii.Estimating overall profit position.

iii.Checking accuracy of functional budgets.

 

16.Fixed Budget

The budget which is design to remain unchanged irrespective volume of output is called fixed budget.It considered as a budget and drawn on the assumption that the output and sales can be accurately estimate.Therefore it is only useful when the actual level of activity equal to the budgeted level of activity.Generally it doesn’t provide a meaningful basis for comparison and control.

 

17.Flexible Budget

The budget at which the actual level of activities arises comes the budget level of activity with the change in volume of output is called flexible budget.Generally it considers fixed,variable and semi-variable cost differently for different levels of output and it also provides a suitable basis to carry on effective comparison.

 

WHAT IS ZERO BASE BUDGET (ZBB) ?

The process of preparing budget from the amount of zero“0” or clean state is called Zero Base Budget. This technique of budgeting was proposed by pitter payhra and introduced by Mr.Jimmy Carter. In other words zero base budgeting is considered as a method of budgeting where all the activities are revalued each time as individual.

 

Generally it is successfully applied to Government expenditure and other business expenditures that doesn’t cover direct material labour, overhead etc.

 

Zero base budgeting is defined as a method of budgeting which requires each cost element to be specifically justified and undertaken for the last time.

 

CHARACTERSTIC OF ZERO BASE BUDGET(ZBB)

Some of the most important characterstic or features of zero base budget(ZBB) are highlighted below:-

 

i.Activities are identified in decision packages.

ii.Decision packages are ranked in order of priority.

iii.Packages are evaluated by systematic analysis.

iv.Decieion packages are linked with corporate objectives.

v.Available resources are directed.

vi.Manager of the decision unit has to completely justify.

 

Steps For Prepare  Zero Base Budget (ZBB)

 

step1:- Determination of a set of objects.

Step2:-Deciding about the extent of to which technique should be applied.

Step3:-Identify the areas of decision making.

Step4:-Developing decision packages or ranking them.

Step5:-Translating decision packages into practicable units.

 

DISADVANTAGES/LIMITATION OF Zero Base Budget (ZBB)

For the sake of clarification some of the most common and basis limitation/ disadvantages of zero base budget are discussed below:-

 

1.Time Consuming & Cost

Generally zero base budgeting is considered as a time consuming and costly process.It requires a lot of paperwork to be done due to the availability of a large number of decision packages.

 

2.Conflicts

It arised due to subjective ranking of various packages that may not give a suitable basis for effective budgeting.

 

3.Opposed by Superior

Such budgeting process is generally opposed by Superior.As generally they force them to scope with new ideas and changes.

 

4.Ignore quantitative aspects

The most important limitation and defects of zero base budgeting is ignorance of quantitative benefits.Normally it considers quantitative aspects of each activity rather than quantitative aspects.