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Chapter4Budgetarycontrol

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Title:Basicfinanceformarketers....

Moredetails

Chapter4Budgetarycontrol
Chapterobjectives
Structureofthechapter
Budgetarycontrolmethods
Managementactionandcostcontrol
Zerobasebudgeting(ZBB)
Keyterms
Therearetwotypesofcontrol,namelybudgetaryandfinancial.Thischapter
concentratesonbudgetarycontrolonly.Thisisbecausefinancialcontrolwas
coveredindetailinchaptersoneandtwo.Budgetarycontrolisdefinedbythe
InstituteofCostandManagementAccountants(CIMA)as:
"Theestablishmentofbudgetsrelatingtheresponsibilitiesofexecutives
totherequirementsofapolicy,andthecontinuouscomparisonofactual
withbudgetedresults,eithertosecurebyindividualactiontheobjective
ofthatpolicy,ortoprovideabasisforitsrevision".

Chapterobjectives
Thischapterisintendedtoprovide:
Anindicationandexplanationoftheimportanceofbudgetarycontrolin
marketingasakeymarketingcontroltechnique
Anoverviewoftheadvantagesanddisadvantagesofbudgeting
Anintroductiontothemethodsforpreparingbudgets
Anappreciationoftheusesofbudgets.

Structureofthechapter
Ofallbusinessactivities,budgetingisoneofthemostimportantand,therefore,
requiresdetailedattention.Thechapterlooksattheconceptofresponsibilitycentres,
andtheadvantagesanddisadvantagesofbudgetarycontrol.Itthengoesontolook
atthedetailofbudgetconstructionandtheusetowhichbudgetscanbeput.Likeall
managementtools,thechapterhighlightstheneedfordetailedinformation,ifthe
techniqueistobeusedtoitsfullestadvantage.

Budgetarycontrolmethods
a)Budget:
Aformalstatementofthefinancialresourcessetasideforcarryingout
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specificactivitiesinagivenperiodoftime.
Ithelpstocoordinatetheactivitiesoftheorganisation.
Anexamplewouldbeanadvertisingbudgetorsalesforcebudget.
b)Budgetarycontrol:
Acontroltechniquewherebyactualresultsarecomparedwith
budgets.
Anydifferences(variances)aremadetheresponsibilityofkey
individualswhocaneitherexercisecontrolactionorrevisetheoriginal
budgets.
Budgetarycontrolandresponsibilitycentres
Theseenablemanagerstomonitororganisationalfunctions.
Aresponsibilitycentrecanbedefinedasanyfunctionalunitheadedbyamanager
whoisresponsiblefortheactivitiesofthatunit.
Therearefourtypesofresponsibilitycentres:
a)Revenuecentres
Organisationalunitsinwhichoutputsaremeasuredinmonetaryterms
butarenotdirectlycomparedtoinputcosts.
b)Expensecentres
Unitswhereinputsaremeasuredinmonetarytermsbutoutputsare
not.
c)Profitcentres
Whereperformanceismeasuredbythedifferencebetweenrevenues
(outputs)andexpenditure(inputs).Interdepartmentalsalesareoften
madeusing"transferprices".
d)Investmentcentres
Whereoutputsarecomparedwiththeassetsemployedinproducing
them,i.e.ROI.
Advantagesofbudgetingandbudgetarycontrol
Thereareanumberofadvantagestobudgetingandbudgetarycontrol:
Compelsmanagementtothinkaboutthefuture,whichisprobablythe
mostimportantfeatureofabudgetaryplanningandcontrolsystem.
Forcesmanagementtolookahead,tosetoutdetailedplansfor
achievingthetargetsforeachdepartment,operationand(ideally)each
manager,toanticipateandgivetheorganisationpurposeanddirection.
Promotescoordinationandcommunication.
Clearlydefinesareasofresponsibility.Requiresmanagersofbudget
centrestobemaderesponsiblefortheachievementofbudgettargets
fortheoperationsundertheirpersonalcontrol.
Providesabasisforperformanceappraisal(varianceanalysis).A
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budgetisbasicallyayardstickagainstwhichactualperformanceis
measuredandassessed.Controlisprovidedbycomparisonsofactual
resultsagainstbudgetplan.Departuresfrombudgetcanthenbe
investigatedandthereasonsforthedifferencescanbedividedinto
controllableandnoncontrollablefactors.
Enablesremedialactiontobetakenasvariancesemerge.
Motivatesemployeesbyparticipatinginthesettingofbudgets.
Improvestheallocationofscarceresources.
Economisesmanagementtimebyusingthemanagementby
exceptionprinciple.
Problemsinbudgeting
Whilstbudgetsmaybeanessentialpartofanymarketingactivitytheydohavea
numberofdisadvantages,particularlyinperceptionterms.
Budgetscanbeseenaspressuredevicesimposedbymanagement,
thusresultingin:
a)badlabourrelations
b)inaccuraterecordkeeping.
Departmentalconflictarisesdueto:
a)disputesoverresourceallocation
b)departmentsblamingeachotheriftargetsarenot
attained.
Itisdifficulttoreconcilepersonal/individualandcorporategoals.
Wastemayariseasmanagersadopttheview,"wehadbetterspendit
orwewillloseit".Thisisoftencoupledwith"empirebuilding"inorderto
enhancetheprestigeofadepartment.
Responsibilityversuscontrolling,i.e.somecostsareundertheinfluence
ofmorethanoneperson,e.g.powercosts.
Managersmayoverestimatecostssothattheywillnotbeblamedin
thefutureshouldtheyoverspend.
Characteristicsofabudget
Agoodbudgetischaracterisedbythefollowing:
Participation:involveasmanypeopleaspossibleindrawingupa
budget.
Comprehensiveness:embracethewholeorganisation.
Standards:baseitonestablishedstandardsofperformance.
Flexibility:allowforchangingcircumstances.
Feedback:constantlymonitorperformance.
Analysisofcostsandrevenues:thiscanbedoneonthebasisof
productlines,departmentsorcostcentres.
Budgetorganisationandadministration:
Inorganisingandadministeringabudgetsystemthefollowingcharacteristicsmay
apply:
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a)Budgetcentres:Unitsresponsibleforthepreparationofbudgets.A
budgetcentremayencompassseveralcostcentres.
b)Budgetcommittee:Thismayconsistofseniormembersofthe
organisation,e.g.departmentalheadsandexecutives(withthe
managingdirectoraschairman).Everypartoftheorganisationshould
berepresentedonthecommittee,sothereshouldbearepresentative
fromsales,production,marketingandsoon.Functionsofthebudget
committeeinclude:
Coordinationofthepreparationofbudgets,includingthe
issueofamanual
Issuingoftimetablesforpreparationofbudgets
Provisionofinformationtoassistbudgetpreparations
Comparisonofactualresultswithbudgetand
investigationofvariances.
c)BudgetOfficer:ControlsthebudgetadministrationThejobinvolves:
liaisingbetweenthebudgetcommitteeandmanagers
responsibleforbudgetpreparation
dealingwithbudgetarycontrolproblems
ensuringthatdeadlinesaremet
educatingpeopleaboutbudgetarycontrol.
d)Budgetmanual:
Thisdocument:
chartstheorganisation
detailsthebudgetprocedures
containsaccountcodesforitemsofexpenditureand
revenue
timetablestheprocess
clearlydefinestheresponsibilityofpersonsinvolvedinthe
budgetingsystem.
Budgetpreparation
Firstly,determinetheprincipalbudgetfactor.Thisisalsoknownasthekeybudget
factororlimitingbudgetfactorandisthefactorwhichwilllimittheactivitiesofan
undertaking.Thislimitsoutput,e.g.sales,materialorlabour.
a)Salesbudget:thisinvolvesarealisticsalesforecast.Thisispreparedinunitsof
eachproductandalsoinsalesvalue.Methodsofsalesforecastinginclude:
salesforceopinions
marketresearch
statisticalmethods(correlationanalysisandexaminationoftrends)
mathematicalmodels.
Inusingthesetechniquesconsider:
company'spricingpolicy
generaleconomicandpoliticalconditions
changesinthepopulation
competition
consumers'incomeandtastes
advertisingandothersalespromotiontechniques
aftersalesservice
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credittermsoffered.
b)Productionbudget:expressedinquantitativetermsonlyandisgearedtothesales
budget.Theproductionmanager'sdutiesinclude:
analysisofplantutilisation
workinprogressbudgets.
Ifrequirementsexceedcapacityhemay:
subcontract
planforovertime
introduceshiftwork
hireorbuyadditionalmachinery
Thematerialspurchasesbudget'sbothquantitativeandfinancial.
c)Rawmaterialsandpurchasingbudget:
Thematerialsusagebudgetisinquantities.
Thematerialspurchasesbudgetisbothquantitativeandfinancial.
Factorsinfluencinga)andb)include:
productionrequirements
planningstocklevels
storagespace
trendsofmaterialprices.
d)Labourbudget:isbothquantitativeandfinancial.Thisisinfluencedby:
productionrequirements
manhoursavailable
gradesoflabourrequired
wagerates(unionagreements)
theneedforincentives.
e)Cashbudget:acashplanforadefinedperiodoftime.Itsummarisesmonthly
receiptsandpayments.Hence,ithighlightsmonthlysurplusesanddeficitsofactual
cash.Itsmainusesare:
tomaintaincontroloverafirm'scashrequirements,e.g.stockand
debtors
toenableafirmtotakeprecautionarymeasuresandarrangein
advanceforinvestmentandloanfacilitieswhenevercashsurplusesor
deficitsarises
toshowthefeasibilityofmanagement'splansincashterms
toillustratethefinancialimpactofchangesinmanagementpolicy,e.g.
changeofcredittermsofferedtocustomers.
Receiptsofcashmaycomefromoneofthefollowing:
cashsales
paymentsbydebtors
thesaleoffixedassets
theissueofnewshares
thereceiptofinterestanddividendsfrominvestments.
Paymentsofcashmaybeforoneormoreofthefollowing:
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purchaseofstocks
paymentsofwagesorotherexpenses
purchaseofcapitalitems
paymentofinterest,dividendsortaxation.
Stepsinpreparingacashbudget
i)Step1:setoutaproformacashbudgetmonthbymonth.Belowisasuggested
layout.

Month1 Month2 Month3

$

Cashreceipts
Receiptsfromdebtors
Salesofcapitalitems
Loansreceived
Proceedsfromshareissues
Anyothercashreceipts
Cashpayments
Paymentstocreditors
Wagesandsalaries
Loanrepayments
Capitalexpenditure
Taxation
Dividends
Anyothercashexpenditure
Receiptslesspayments
Openingcashbalanceb/f

Closingcashbalancec/f

ii)Step2:sortoutcashreceiptsfromdebtors
iii)Step3:otherincome
iv)Step4:sortoutcashpaymentstosuppliers
v)Step5:establishothercashpaymentsinthemonth
Figure4.1showsthecompositionofamasterbudgetanalysis.
Figure4.1Compositionofamasterbudget
OPERATINGBUDGET FINANCIALBUDGET
consistsof:

consistsof

BudgetP/Lacc:get:

Cashbudget

Productionbudget

Balancesheet

Materialsbudget

Fundsstatement

Labourbudget
Admin.budget
Stocksbudget

f)Otherbudgets:
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Theseincludebudgetsfor:
administration
researchanddevelopment
sellinganddistributionexpenses
capitalexpenditures
workingcapital(debtorsandcreditors).
Themasterbudget(figure4.1)illustratesthis.Nowattemptexercise4.1.
Exercise4.1BudgetingI
DrawupacashbudgetforD.Sitholeshowingthebalanceattheendofeach
month,fromthefollowinginformationprovidedbyherforthesixmonthsended31
December19X2.
a)OpeningCash$1,200.
19X2
Salesat$20per
unit

19X3

MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB
260

200

320

290 400 300

350 400 390

400

260 250

Cashisreceivedforsalesafter3monthsfollowingthesales.
c)Productioninunits:240 270 300 320 350 370 380 340 310 260 250

d)Rawmaterialscost$5/unit.Ofthis80%ispaidinthemonthofproductionand
20%afterproduction.
e)Directlabourcostsof$8/unitarepayableinthemonthofproduction.
f)Variableexpensesare$2/unit.Ofthis50%ispaidinthesamemonthas
productionand50%inthemonthfollowingproduction.
g)Fixedexpensesare$400/monthpayableeachmonth.
h)Machinerycosting$2,000tobepaidforinOctober19X2.
i)Willreceivealegacyof$2,500inDecember19X2.
j)Drawingstobe$300/month.
Anexample
AsugarcanefarmintheLowvelddistrictmaydeviseanoperatingbudgetasfollows:
Cultivation
Irrigation
Fieldmaintenance
Harvesting
Transportation.
Witheachoperation,therewillbecostsforlabour,materialsandmachineryusage.
Therefore,fore.g.harvesting,thesemayincludefourresources,namely:
Labour:
cutting
sundry
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Tractors
Canetrailers
Implementsandsundries.
Havingidentifiedcostcentres,thenextstepwillbetomakeaquantitativecalculation
oftheresourcestobeused,andtofurtherbreakthisdowntoshorterperiods,say,
onemonthorthreemonths.Thelengthofperiodchosenisimportantinthatthe
shorteritis,thegreaterthecontrolthatcanbeexercisedbythebudgetbutthe
greatertheexpenseinpreparationofthebudgetandreportingofanyvariances.
Thequantitativebudgetforharvestingmaybecalculatedasshowninfigure4.2.
Figure4.2Quantitativeharvestingbudget
Harvesting

1stquarter 2ndquarter

3rdquarter

4thquarter

Labour
Cutting

nil

9,000tonnes

16,000tonnes 10,000tonnes

Sundry

nil

300mandays 450mandays 450mandays

Tractors

nil

630hours

1,100hours

Canetrailers

nil

9,000tonnes

16,000tonnes 10,000tonnes

Imp,&sundries nil

9,000tonnes

16,000tonnes 10,000tonnes

700hours

Eachitemismeasuredindifferentquantitativeunitstonnesofcane,mandaysetc.
anddependsonindividualjudgementofwhichisthebestunittouse.
Oncethebudgetinquantitativetermshasbeenprepared,unitcostscanthenbe
allocatedtotheindividualitemstoarriveatabudgetforharvestinginfinancialterms
asshownintable4.2.
Chargeoutcosts
Intable4.2tractorshaveaunitcostof$7.50perhourmachinesliketractorshave
awholerangeofcostslikefuelandoil,repairsandmaintenance,driver,licence,
roadtaxandinsuranceanddepreciation.Someofthecostsarefixed,e.g.
depreciationandinsurance,whereassomevarydirectlywithuseofthetractor,e.g.
fuelandoil.Othercostssuchasrepairsareunpredictableandmaybeveryhighor
lowanestimatedfigurebasedonpastexperience.
Figure4.3Harvestingcostbudget
Item
harvesting

Unitcost

1st
quarter

2nd
quarter

3rd
quarter

4th
quarter

Total

Labour
Cutting

$0.75per
tonne

6,750

12,000

7,500

26,250

Sundry

$2.50perday

750

1,125

1,125

3,000

Tractors

$7.50perhour

4,725

8,250

5,250

18,225

CaneTrailers

$0.15per
tonne

1,350

2,400

1,500

5,250

Imp.&sundries $0.25per
tonne

2,250

4,000

2,500

8,750

$15,825

$27,775

$17,875

$61,475

So,overalloperatingcostofthetractorfortheyearmaybebudgetedasshownin
figure4.4.
Ifthetractorisusedformorethan1,000hoursthentherewillbeanoverrecovery
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onitsoperationalcostsandifusedforlessthan1,000hourstherewillbeunder
recovery,i.e.inthefirstinstancemakinganinternal'profit'andintheseconda'loss'.
Figure4.4Tractorcosts

Fixedcosts

Depreciation

Unitrate

Costperannum(1,000hours)

($)

($)

2,000.00

2,000.00

Licenceandinsurance 200.00

200.00

Driver

100.00permonth 1,200.00

Repairs

600.00perannum 600.00

Variablecosts Fuelandoil
Maintenance

2.00perhour

2,000.00

3.00per200hours 1,500.00
7,500.00

No.ofhoursused

1,000.00

Costperhour

7.50

Masterbudget
Themasterbudgetforthesugarcanefarmmaybeasshowninfigure4.5.The
budgetrepresentsanoverallobjectiveforthefarmforthewholeyearahead,
expressedinfinancialterms.
Table4.5Operatingbudgetforsugarcanefarm19X4
1stquarter 2ndquarter 3rdquarter 4thquarter Total$
Revenuefromcane

130,000

250,000

120,000

500,000

Less:Costs
Cultivation

37,261

48,268

42,368

55,416

183,313

Irrigation

7,278

15,297

18,473

11,329

52,377

Fieldmaintenance

4,826

12,923

15,991

7,262

41,002

Harvesting

15,825

27,775

17,875

61,475

Transportation

14,100

24,750

15,750

54,600

49,365

106,413

129,357

107,632

392,767

Add:Openingvaluation 85,800

135,165

112,240

94,260

85,800

135,165

241,578

241,597

201,892

478,567

Less:Closingvaluation 135,165

112,240

94,260

90,290

90,290

Netcropcost

129,338

147,337

111,602

388,277

Grosssurplus

66,200

102,663

8,398

111,723

Less:Overheads

5,876

7,361

7,486

5,321

26,044

Netprofitless)

(5,876)

(6,699)

95,177

3,077

85,679

Oncetheoperatingbudgethasbeenprepared,twofurtherbudgetscanbedone,
namely:
i.Balancesheetattheendoftheyear.
ii.Cashflowbudgetwhichshowstheamountofcashnecessaryto
supporttheoperatingbudget.Itisofgreatimportancethatthebusiness
hassufficientfundstosupporttheplannedoperationalbudget.
Reportingback
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Duringtheyearthemanagementaccountantwillpreparestatements,asquicklyas
possibleaftereachoperatingperiod,inourexample,eachquarter,settingoutthe
actualoperatingcostsagainstthebudgetedcosts.Thisstatementwillcalculatethe
differencebetweenthe'budgeted'andthe'actual'cost,whichiscalledthe'variance'.
Therearemanywaysinwhichmanagementaccountscanbeprepared.Tocontinue
withourexampleofharvestingonthesugarcanefarm,managementaccountsat
theendofthethirdquartercanbepresentedasshowninfigure4.6.
Figure4.6Managementaccountsactualcostsagainstbudgetcosts
Managementaccountsforsugarcanefarm3rdquarter19X4
3rdquarter

Yeartodate

ItemHarvesting Actual Budget Variance Actual Budget Variance

Labour
Cutting

12,200 12,000 (200)

19,060 18,750 (310)

Sundry

742

1,125

383

1,584

Tractors

9,375

8,250

(1,125)

13,500 12,975 (525)

Canetrailers

1,678

2,400

722

2,505

3,750

1,245

Imp&sundries

4,270

4,000

(270)

6,513

6,250

(263)

28,265 27,775 (490)

1,875

291

43,162 43,600 438

Here,actualharvestingcostsforthe3rdquarterare$28,265againstabudgetof
$27,775indicatinganincreaseof$490whilstthecumulativefigurefortheyearto
dateshowsanoverallsavingof$438.Itappearsthatactualcostsarelessthan
budgetedcosts,sotheharvestingoperationsareproceedingwithinthebudgetset
andsatisfactory.However,afurtherlookmayrevealthatthismaynotbethecase.
Thebudgetwasbasedonacanetonnagecutof16,000tonnesinthe3rdquarter
andacumulativetonnageof25,000.Ifthesetonnageshavebeenachievedthenthe
statementwillbesatisfactory.Iftheactualproductionwasmuchhigherthan
budgetedthenthesecostsrepresentaveryconsiderablesaving,eventhoughonlya
marginalsavingisshownbythevariance.Similarly,iftheactualtonnagewas
significantlylessthanbudgeted,thenwhatisindicatedasamarginalsavinginthe
variancemay,infact,beaconsiderableoverspending.
Priceandquantityvariances
Justtostatethatthereisavarianceonaparticularitemofexpendituredoesnot
reallymeanalot.Mostcostsarecomposedoftwoelementsthequantityusedand
thepriceperunit.Avariancebetweentheactualcostofanitemanditsbudgeted
costmaybeduetooneorbothofthesefactors.Apparentsimilaritybetween
budgetedandactualcostsmayhidesignificantcompensatingvariancesbetween
priceandusage.
Forexample,sayitisbudgetedtotake300mandaysat$3.00permandaygiving
atotalbudgetedcostof$900.00.Theactualcostoncompletionwas$875.00,
showingasavingof$25.00.Furtherinvestigationsmayrevealthatthejobtook250
mandaysatadailyrateof$3.50afavourableusagevariancebutavery
unfavourablepricevariance.Managementmaythereforeneedtoinvestigatesome
significantvariancesrevealedbyfurtheranalysis,whichacomparisonofthetotal
costswouldnothaverevealed.Priceandusagevariancesformajoritemsof
expensearediscussedbelow.
Labour
Thedifferencebetweenactuallabourcostsandbudgetedorstandardlabourcostsis
knownasdirectwagesvariance.Thisvariancemayariseduetoadifferenceinthe
amountoflabourusedorthepriceperunitoflabour,i.e.thewagerate.Thedirect
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wagesvariancecanbesplitinto:
i)Wageratevariance:thewageratewashigherorlowerthan
budgeted,e.g.usingmoreunskilledlabour,orworkingovertimeata
higherrate.
ii)Labourefficiencyvariance:ariseswhentheactualtimespentona
particularjobishigherorlowerthanthestandardlabourhours
specified,e.g.breakdownofamachine.
Materials
Thevarianceformaterialscostcouldalsobesplitintopriceandusageelements:
i)Materialpricevariance:ariseswhentheactualunitpriceisgreateror
lowerthanbudgeted.Couldbeduetoinflation,discounts,alternative
suppliersetc.
ii)Materialquantityvariance:ariseswhentheactualamountofmaterial
usedisgreaterorlowerthantheamountspecifiedinthebudget,e.g.a
budgetedfertiliserat350kgperhectaremaybeincreasedor
decreasedwhentheactualfertiliserisapplied,givingrisetoausage
variance.
Overheads
Again,overheadvariancecanbesplitinto:
i)Overheadvolumevariance:whereoverheadsaretakenintothecost
centres,aproductionhigherorlowerthanbudgetedwillcauseanover
orunderabsorptionofoverheads.
ii)Overheadexpenditurevariance:wheretheactualoverhead
expenditureishigherorlowerthanthatbudgetedforthelevelofoutput
actuallyproduced.
Calculationofpriceandusagevariances
Thepriceandusagevariancearecalculatedasfollows:
Pricevariance=(budgetedpriceactualprice)Xactualquantity
Usagevariance=(budgetedquantityactualquantity)Xbudgeted
price
Nowattemptexercise4.2.
Exercise4.2Computationoflabourvariances
Itwasbudgetedthatitwouldtake200mandaysat$10.00perdaytocompletethe
taskcosting$2,000.00whentheactualcostwas$1,875.00,being150mandaysat
$12.50perday.Calculate:
i)Pricevariance
ii)Usagevariance
Commentbrieflyontheresultsofyourcalculation.

Managementactionandcostcontrol
Producinginformationinmanagementaccountingformisexpensiveintermsofthe
timeandeffortinvolved.Itwillbeverywastefuliftheinformationonceproducedis
notputintoeffectiveuse.
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Therearefivepartstoaneffectivecostcontrolsystem.Theseare:
a)preparationofbudgets
b)communicatingandagreeingbudgetswithallconcerned
c)havinganaccountingsystemthatwillrecordallactualcosts
d)preparingstatementsthatwillcompareactualcostswithbudgets,
showinganyvariancesanddisclosingthereasonsforthem,and
e)takinganyappropriateactionbasedontheanalysisofthevariances
ind)above.
Action(s)thatcanbetakenwhenasignificantvariancehasbeenrevealedwill
dependonthenatureofthevarianceitself.Somevariancescanbeidentifiedtoa
specificdepartmentanditiswithinthatdepartment'scontroltotakecorrective
action.Othervariancesmightprovetobemuchmoredifficult,andsometimes
impossible,tocontrol.
Variancesrevealedarehistoric.Theyshowwhathappenedlastmonthorlast
quarterandnoamountofanalysisanddiscussioncanalterthat.However,theycan
beusedtoinfluencemanagerialactioninfutureperiods.

Zerobasebudgeting(ZBB)
Afterabudgetingsystemhasbeeninoperationforsometime,thereisatendency
fornextyear'sbudgettobejustifiedbyreferencetotheactuallevelsbeingachieved
atpresent.Infactthisispartofthefinancialanalysisdiscussedsofar,buttheproper
analysisprocesstakesintoaccountallthechangeswhichshouldaffectthefuture
activitiesofthecompany.Evenusingsuchananalyticalbase,somebusinessesfind
thathistoricalcomparisons,andparticularlythecurrentlevelofconstraintson
resources,caninhibitreallyinnovativechangesinbudgets.Thiscancauseasevere
handicapforthebusinessbecausethebudgetshouldbethefirstyearofthelong
rangeplan.Thus,ifchangesarenotstartedinthebudgetperiod,itwillbedifficultfor
thebusinesstomaketheprogressnecessarytoachievelongertermobjectives.
Onewayofbreakingoutofthiscyclicalbudgetingproblemistogobacktobasics
anddevelopthebudgetfromanassumptionofnoexistingresources(thatis,azero
base).Thismeansallresourceswillhavetobejustifiedandthechosenwayof
achievinganyspecifiedobjectiveswillhavetobecomparedwiththealternatives.For
example,inthesalesarea,thecurrentexistingfieldsalesforcewillbeignored,and
theoptimumwayofachievingthesalesobjectivesinthatparticularmarketforthe
particulargoodsorservicesshouldbedeveloped.Thismightnotincludeanyfield
salesforce,oradifferentsizedteam,andthecompanythenhastoplanhowto
implementthisnewstrategy.
Theobviousproblemofthiszerobasebudgetingprocessisthemassiveamountof
managerialtimeneededtocarryouttheexercise.Hence,somecompaniescarryout
thefullprocesseveryfiveyears,butinthatyearthebusinesscanalmostgrindtoa
halt.Thus,analternativewayistolookindepthatoneareaofthebusinesseach
yearonarollingbasis,sothateachsectordoesazerobasebudgeteveryfiveyears
orso.

Keyterms
Budgeting
Budgetarycontrol
Budgetpreparation
Managementactionandcostcontrol
Masterbudget
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Chapter4Budgetarycontrol

Priceandquantityvariance
Responsibilitycentres
Zerobasedbudgeting

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