MBA Accounting

Before managers can focus on making any decision making, one of the crucial element is the need to under the various cost behavior. The following are discussed:

Variable, Fixed & Mixed Costs(Part1) 

Direct Versus Indirect Costs(Part2)

PRODUCT VERSUS PERIOD COSTS(PART3)

How Are Costs Being Classified(Part4)

Here in this Part 3 the difference between Product and Period Costs are explained.

Before managers can focus on making any decision making, one of the crucial element is the need to under the various cost behavior. The following are discussed:

Variable, Fixed & Mixed Costs(Part1) 

DIRECT VERSUS INDIRECT COSTS(PART2)

Product Versus Period Costs(Part3)

How Are Costs Being Classified(Part4)

This Part 1 discussed the various cost behavior-

Before managers can focus on making any decision making, one of the crucial element is the need to under the various cost behavior. The following are discussed:

VARIABLE, FIXED & MIXED COSTS(PART1)

Direct Versus Indirect Costs(Part2)

Product Versus Period Costs(Part3)

How Are Costs Being Classified(Part4)

This Part 1 discussed the various cost behavior-variable,fixed and mixed costs.

Before the managers can embark on the preparation of budget, they should at least know about the following basics pertaining to budgeting:-

1. The Objectives of Budgeting(Part1)
2. The Benefits & Limitation of Budgeting(Part2)
3. Key Success Factors for Budgeting(Part3)
4. Steps Involved in Budgeting(Part4)
5. Difference between Budget & Budgetary Control System(Part5)
   
6. Key features of budgetary control(Part6)
7. Objectives & Purposes/Roles Of Budget Commitee(Part7)
8. Budget Manual(Part8)
9. Types Of Budget-Flexible Budget(Part9)
10. Types of Budget-Incremental Budget(Part10)
11. Types of Budget-Zero Based Budgeting(Part11)
12. UNDERSTAND WHAT IS RESPONSIBILITY ACCOUNTING(PART12)

Here in this Part 12, Responsibility Accounting is narrated as it’s very closed linked to budgetary control/budgeting.

Responsibility Accounting is a system where:

• managers are held responsible for the difference between the actual performance and those budgeted;

• the managers are closely involved in the planning and controlling of the resources and

• has a Responsibility centre which is a division or department in the organization for them to be responsible for their performance.

There are basically the following four types of Responsibility centres:

Before the managers can embark on the preparation of budget, they should at least know about the following basics pertaining to budgeting:-

1. The Objectives of Budgeting(Part1)
2. The Benefits & Limitation of Budgeting(Part2)
3. Key Success Factors for Budgeting(Part3)
4. Steps Involved in Budgeting(Part4)
5. Difference between Budget & Budgetary Control System(Part5)
   
6. Key features of budgetary control(Part6)
7. Objectives & Purposes/Roles Of Budget Commitee(Part7)
8. Budget Manual(Part8)
9. Types Of Budget-Flexible Budget(Part9)
10. Types of Budget-Incremental Budget(Part10)
11. TYPES OF BUDGET-ZERO BASED BUDGETING(Part11)
12. Understand what is Responsibility Accounting(Part12)

Here in this Part 11, Zero Based Budgeting is discussed-its introduction/origin/history and the advantages and disadvantages.

Introduction to Zero-based budgeting:

Zero based budgeting is not at all new. It was started in government budgeting in Great Britain and in 1962, the US Department of Agriculture devised the zero-based budgeting approach.

Zero Based Budgeting is an approach to budgeting that starts from the premise that no costs or activities should be factored into the plans for the coming budget period, just because they figured in the costs or activities for the current or previous periods. Rather, everything that is to be included in the budget must be considered and justified.

Zero-based budgeting naturally has always being vogue with management and usually is their keynote during the annual budget preparation .
 

They will always caution those preparers of annual budget: “ to justify each item of expenditure and avoids the mindset of accepting last year’s expenses as the starting point and then add some % factor into them.

Let starts with the various advantages of using Zero-based budgeting approach:

• The main benefit is to focus attention on the actual resources that are required in order to produce an output or outcome, rather than the percentage increase or decrease compared to the previous year. More importantly, it complies with management’s directive not to blindly follow last year figure;It can be useful for shaking up a process that may have grown stale and counterproductive over time.
• By starting at zero, it therefore increased all level of managers’ awareness first  to identify their specific objectives, quantify them and consider the most cost effectiveness ways of achieving them which can  lead to better resource allocation
• Is an adaptive approach to changing circumstances
• From a practical standpoint, if initially a company have utilised the traditional approaches of adding % to last year figure and then revert to zero based, normally they will be quite astonished to see expenses which in the first place should not be there. Hopefully, they will question these detailed costs. This  therefore facilitates participation in the budgeting process;
• Generally report some improvement quantitatively or qualitatively. That is, the process has either saved money, improved services, or both.
• Make budget discussions more meaningful during review sessions.
• It is more user friendly to operational managers than the traditional incremental budget model. It moves the process away from the bookkeeper’s number crunching spreadsheets, and engenders a balanced partnership between the finance professionals and the budget holders in the analytical and decision-making processes

Next, what are the cons or limitation of zero-based budgeting:

• May increase the time and expense of preparing a budget. This is particularly true as it takes a lot of managerial time. It takes a considerable amount of time to go through the process of reviewing operations in enough detail to justify costs each budget cycle without relying on past expenditures.
• Can make matters worse if not done in the right way. A substantial commitment must be made by all involved to ensure that this doesn’t happen.
• The success of adopting zero-based budgeting hinges strongly on leadership that is dedicated to the task. It is important that the reviewer of the budget should not have a pecuniary interest in maintaining the status quo. If we involved people with self interest in the zero based budgeting, this will prove counterproductive as they will be very defensive to protect their interests.
• As zero based budgeting involves a lot of time, it should not be conducted for every department, every year. Such a move may prove impossible to manage. Hence we should only  choose several departments/divisions and by rotation basis.

Perhaps, a solution to onerous burden of preparing zero-based budgeting is that instead of  re-establishing each line of expenditure from zero, the reverse approach is to have the last year figures and then deduct out all known and major expenditures and leaves with it the minimum operating expenditure of the company.  By using this so-called working backward approach, much time is saved.

Before the managers can embark on the preparation of budget, they should at least know about the following basics pertaining to budgeting:-

1. The Objectives of Budgeting(Part1)
2. The Benefits & Limitation of Budgeting(Part2)
3. Key Success Factors for Budgeting(Part3)
4. Steps Involved in Budgeting(Part4)
5. Difference between Budget & Budgetary Control System(Part5)
   
6. Key features of budgetary control(Part6)
7. Objectives & Purposes/Roles Of Budget Commitee(Part7)
8. Budget Manual(Part8)
9. Types Of Budget-Flexible Budget(Part9)
10. TYPES OF BUDGET- INCREMENTAL BUDGET(PART10)
11. Types of Budget-Zero Based Budgeting(Part11)
12. Understand what is Responsibility Accounting(Part12)

Here,in this Part 9, we learned about the Incremental Budget, its pros & cons.

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This Part 9 on budgeting explained what’s  a fixed and flexible budget:-

A flexible budget is a budget which is designed to change in accordance with the LEVEL OF ACTIVITY attained.

It is also known as Variable budget as the budget recognizes the difference in cost behavior namely fixed and variable costs in relations to fluctuations in output or turnover. The budget is designed to change appropriately with such fluctuation.

For a fixed budget, the budget remains unchanged irrespective of the level of activity actually attained.

The fixed budget is prepared based only on one level of output.

Therefore, if the level of output actually achieved differs considerably from that budgeted, large variances will arise.

THE MAIN DIFFERENCE Between Fixed & Flexible Budget:

The steps involve in the preparation of the flexible budget as follows:

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Here,in this Part 7, we learned the following reasons for companies to set up Budget Manual:-

• The budget manual documents the administration of budgeting. It contains the purpose of, procedure for and responsibility of the people involved in budgeting.

Others details includes:

• The objectives of the business and the part which budgetary control plays in achieving these objectives;

• The procedures to be adopted in operating the budgetary control system;

• The responsibilities and duties of those connected with the preparation of the budgets;

• The reports and statements required for each budget period;

• The functions of the budget committee and

• The accounts classification to be used.

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Here,in this Part 7, as managers who participate in the budget preparation, it is quite important to at least understand the role of Budget Committee. Before that, we need to understand that in many medium to large organization, we can see Budget Committee being established which comprises executives from each department, to co-ordinate and review the departmental budgets in relation to the company policies.

To make budgeting to be successful, top management must be involved in the administration of budgets. The chief executive must bear the ultimate responsibility for budgeting. The actual work of budgeting is done by a budget committee. The chief executive should head the budget committee.

Tabulate below the objectives/purposes/roles of a Budget Committee.

• Reconciles differences of opinion between departmental managers;
• Resolves disputes between managers;
• Give advice to board of directors and chief executive;
• Reviews department budgets and making recommendations;
• Examines periodic reports showing actual performance compared with the budget Significant variances are identified and recommendation made on actions to be taken;
• Develop and examines long term plans;
• Identifies budget objectives;
• Creates a better understanding and awareness among managers of the role of each others deparment;
• Coordination of budgets or budgeting;
• Review external conditions such as economic conditions for the ensuing period; and
• Considers forecasts compiled by departmental managers.

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Here,in this Part 6, we learn the following key features of a budgetary control systems:

• Setting attainable objectives;
• Assigning executive responsibility;
• Planning the activities to achieve the objectives;
• Comparing actual results against the plan;
• Taking corrective actions and
• Reviewing and revising plans in the light of changes.