HARAMAYA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
FUNDAMENTAL OF ACCOUNTING I
Individual assignment
Full name…………………………………………………ID NO
Ibsaa Abdallahi Mohammed…………………..059/14

Submission to…………………………………..
Submitted date………………………………….
 1)Incremental Budgeting:
Definition: Incremental budgeting is a budgeting
method in which the budget for the upcoming period is
based on the previous period’s budget, with
adjustments made for changes in activity levels or other
factors. It involves making small incremental changes to
the existing budget to accommodate variations in costs
or revenues.

Brief Discussion:
- Incremental budgeting is a straightforward and easy-
to-implement approach, as it builds on the existing
budget without requiring a complete reevaluation of all
expenses.
- However, it can lead to budgetary slack, where
managers inflate their budgets to ensure they have
enough funds for unforeseen expenses. This can result
in inefficiencies and wasteful spending.
Advantages:
- It is simple and easy to understand, making it a
popular choice for many organizations.
- It allows for stability and predictability in budgeting, as
it builds on the previous period’s budget.
- It requires less time and resources to prepare
compared to other budgeting methods.

Disadvantages:
- It can lead to budgetary slack, as managers may inflate
their budgets to ensure they have enough funds for
unforeseen expenses.
- It may not encourage cost-saving measures or
innovative thinking, as it assumes that the previous
period’s budget is an accurate reflection of future needs.
- It may not be suitable for industries or organizations
with rapidly changing environments, as it does not
allow for flexible adjustments in response to changes.

2)Zero-based Budgeting (ZBB):

Definition: Zero-based budgeting is a budgeting method
that requires each department or unit to justify all
expenses from scratch, starting from a “zero base.”
Instead of building on the previous period’s budget, ZBB
requires managers to analyze and justify all expenses
based on current needs and priorities.

Brief Discussion:
- ZBB encourages cost efficiency and effectiveness by
forcing managers to prioritize spending based on the
value added by each activity. This can lead to better
resource allocation and cost control.
- However, ZBB is time-consuming and resource-
intensive, as it requires a detailed analysis of all
activities and costs. It may also be demotivating for
managers, as they have to justify every expense, even
those that are considered routine or necessary.
Advantages:
- It forces managers to justify all expenses from scratch,
leading to a thorough review of all activities and costs.
- It encourages cost efficiency and effectiveness, as it
requires managers to prioritize spending based on the
value added by each activity.
- It can lead to a more accurate allocation of resources,
as it ensures that all expenses are based on current
needs and priorities.

Disadvantages:
- It is time-consuming and resource-intensive, as it
requires a detailed analysis of all activities and costs.
- It may be demotivating for managers, as they have to
justify every expense, even those that are considered
routine or necessary.
- It may not be suitable for all types of organizations,
especially those with stable and predictable
environments, as the benefits of ZBB may not outweigh
the costs of implementation.
 3)Rolling (Continuous) Budgeting:
Definition: Rolling budgeting, also known as continuous
budgeting, is a budgeting method that involves regularly
updating the budget based on actual performance and
changing conditions. Instead of preparing a new budget
annually, rolling budgeting continuously updates the
budget by adding a new period as the current period
expires.

Brief Discussion:
- Rolling budgeting allows for flexibility and adaptability,
as it continuously updates the budget based on real-
time data and feedback. This can lead to better
communication and coordination between different
departments.
- However, it requires a significant amount of time and
effort to maintain, as it involves frequent updates and
revisions. It may also create uncertainty and instability,
as managers may feel pressured to constantly adjust
their plans and forecasts.
Advantages:
- It allows for flexibility and adaptability, as it
continuously updates the budget based on actual
performance and changing conditions.
- It encourages better communication and coordination
between different departments, as it requires regular
reviews and adjustments.
- It provides a more accurate forecast of future
performance, as it incorporates real-time data and
feedback.

Disadvantages:
- It requires a significant amount of time and effort to
maintain, as it involves frequent updates and revisions.
- It may create uncertainty and instability, as managers
may feel pressured to constantly adjust their plans and
forecasts.
- It may be challenging to implement in organizations
with traditional budgeting processes and cultures, as it
requires a shift towards a more dynamic and responsive
approach.
 4)Activity-based Budgeting (ABB):
Definition: Activity-based budgeting is a budgeting
method that links budgeting directly to activities and
outputs. It focuses on the resources required for specific
activities and provides a detailed breakdown of costs at
the activity level.

Brief Discussion:
- ABB helps in identifying inefficiencies and areas for
improvement by focusing on the resources required for
specific activities. It can lead to better resource
allocation and cost control.
- However, ABB requires a significant amount of time
and resources to implement, as it involves a detailed
analysis of activities and their associated costs. It may
also be challenging to identify and allocate costs
accurately to specific activities in complex organizations.

Advantages:
- It links budgeting directly to activities and outputs,
providing a clear understanding of the costs associated
with each activity.
- It helps in identifying inefficiencies and areas for
improvement, as it focuses on the resources required
for specific activities.
- It can lead to better resource allocation and cost
control, as it provides a detailed breakdown of costs at
the activity level.

Disadvantages:
- It requires a significant amount of time and resources
to implement, as it involves a detailed analysis of
activities and their associated costs.
- It may be challenging to identify and allocate costs
accurately to specific activities, especially in complex or
multifaceted organizations.
- It may not be suitable for all types of organizations,
especially those with standardized or repetitive
activities, as the benefits of ABB may not outweigh the
costs of implementation.

5)Performance-based Budgeting (PBB):

Definition: Performance-based budgeting is a budgeting
method that aligns budgeting with organizational goals
and objectives. It emphasizes the achievement of
specific performance targets and requires clear
performance measures to be established.

Brief Discussion:
- PBB promotes accountability and transparency by
aligning budgeting with organizational goals. It
encourages a focus on results and continuous
improvement by emphasizing the achievement of
specific performance targets.
- However, it may be challenging to establish meaningful
performance measures and targets, especially in
complex organizations. It can also create tension
between departments or units if they prioritize their
own performance targets over the overall goals of the
organization.
Advantages:
- It aligns budgeting with organizational goals and
objectives, ensuring that resources are allocated based
on desired outcomes.
- It promotes accountability and transparency, as it
requires clear performance measures and targets to be
established.
- It encourages a focus on results and continuous
improvement, as it emphasizes the achievement of
specific performance targets.

Disadvantages:
- It may be challenging to establish meaningful
performance measures and targets, especially in
complex or multifaceted organizations.
- It can create tension and competition between de