FINANCIAL PLANNING

AND ANALYSIS: THE

MASTER BUDGET

Chapter
BY:
9
ASSOC. PROF DR
RUZITA JUSOH

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Outline

 Alternative Budgeting Approaches

 Behavioral issues in budgeting.
Alternative Budgeting
Approaches
 Activity-based budgeting
 Zero-based budgeting
 Incremental budgeting
 Kaizen-budgeting
 Rolling budget
Activity-Based Costing versus Activity-
Based Activity Based Budgeting (ABB)
Resources Resources
Activity-Based
Costing (ABC)

Activities Activities

Activity-Based
Cost objects: Budgeting (ABB)
Forecast of products
products and services and services to be
produced, and produced and
customers served. customers served.
9-4
 -5
Activity-Based Budgeting -

Activity-based budgeting is a
budgeting process based on activities
and cost drivers of operations
Itstarts with the budgeted output and
segregates costs required for the
budgeted output into homogeneous
activity cost pools (such as unit,
batch, product-sustaining, and
facility-sustaining activity cost pools)
 -6
Zero-based Budgeting (ZBB) -
 Zero-based budgeting (ZBB) is a budgeting process
that requires managers to prepare budgets from a
zero base.
 resources are allocated to each activity without
considering the past budgets or achievements.
 A zero-base budgeting process allows no activities or
functions to be included in the budget unless
managers can justify their need
 Zero-based budgeting requires managers or
budgeting teams to perform in-depth reviews and
analyses of all budget items
 Eliminates all sorts of inefficiencies and avoids any
wasteful expense.
 More time consuming
 -7
Incremental budgeting -

 Incremental budgeting is a budgeting method where current

year’s budget is prepared by making changes in the past
year’s budget.
 The changes are in the form of addition or reduction of
expenses to last year’s budget.
 Inefficiencies/wasteful expenses present in the activities are
mostly ignored.
 Less time consuming
 Easy to prepare
 do not require any specialized knowledge or training to
prepare the budget, not like zero-based budgeting
 -8
Kaizen Budgeting -

 Kaizenbudgeting is a budgeting approach

that explicitly demands continuous
improvement and incorporates the
expected improvements in the budget
A firm using kaizen budgeting prepares
budgets based on the desired future
operating processes for the budget period
 This
is an improvement over the current
operating processes, rather than the
continuation of the current practices as is
often the case in traditional budgeting
 -9
Budget Revision -

Strictly
implementing a budget as
prescribed even when the actual
events differ significantly from those
expected certainly is not a desirable
behavior
In such cases, managers should be
encouraged not to rely on the budget
as the absolute guideline in operations
Systematic, periodic revision of the
approved budget or the use of a
continuous budget can be an
advantage in dynamic operations
 -
10
Behavioral aspects of -

budgeting

 Participationin the budgetary

process (i.e goal/target setting)
Authoritative
Participative

 Degree of budget target difficulty

 -
11
Authoritative Budgeting -

 Budgeting processes are either top down or bottom

up
 Ina top-down budgeting process, top
management prepares budgets for the entire
organization (including those for lower-level
operations)
 This process is often referred to as authoritative
budgeting.
 Leads to a lack of commitment/motivation on the
part of budgetees.
 -
Participative Budgeting 12
-

Ina bottom-up budgeting process,

the people affected by the
budget, including lower-level
employees, are involved in the
budget preparation process
This process is often referred
to as participative budgeting
 Generate
commitment/motivation
to meeting the targets/objectives
However, can lead to budget slack
 Participative Budgeting

Top Management

Middle Middle
Management Management

Supervisor Supervisor Supervisor Supervisor

Flow of Budget Data

9-13
 -
Authoritative or Participative Budgeting
14
-

An effective budgeting process often

combines both top-down and bottom-
up budgeting approaches
The final budget usually is reached
after several rounds of negotiations
 -
15
Difficulty Level of the Budget -
Target
An easy budget target may fail to
encourage the employees to give their best
efforts
A budget target that is very difficult to
achieve can, however, discourage
mangers from even trying to attain it
Ideally,budget targets
should be challenging
yet attainable (realistic target)
 -
16
Budget Difficulty and Effort -

High

Effor
t
Low
Easy Difficult
Budget
Difficulty
 -
17
Budgetary Slack -

 Budgetary slack is a cushion created in a

budget by management to increase the
chances of actual performance beating the
budget…easier to achieve
 It is like padding the budget.
 It is the difference between the budget
amount and the budget estimate.
 It is the deliberate under-estimation of
budgeted revenue or over-estimation of
budgeted expenses.
Behavioral Impact of Budgets

Budgetary Slack: Padding the Budget

People often perceive that their
performance will look better in
their superiors’ eyes if they can
“beat the budget.”

9-18
End Chapter 9 – part II

9-19