Impact of Activity Based Budgeting and Zero Based Budgeting on Budgeting Process

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ABB involve three steps:

1. Recognise activities and their cost drivers

2. Estimate the quantity of units of cost driver for the necessary activity level

3. Determine the cost driver rate (cost per unit of activity) (Mak and Roush, 1996; Hansen et al., 2003; Stevens, 2004; Bengu, 2010).

The ABB gives numerous possible advantages:

First harmonising operational necessities by preventing unnecessary computations focusing on creating budget from activities and resources (Hansen and Torok, 2003).

More complex operational model in the budgeting gives better set of instruments for balancing ability (Hansen and Torok, 2003).

Lover-level management and personnel can easier understand and exchange budgeting information. Additionally enlarged set of options for modifying results gives managers capability to respond quicker plus make better performance measurement, estimation and judgement (Mak and Roush, 1996; Hansen et al., 2003; Stevens, 2004; Bengu, 2010).

In conclusion ABB support a horizontal view of the business compare to conventional vertical view of traditional budgeting (Hansen and Torok, 2003).

Here are some of the disadvantages of ABB:

Activity-based budgeting is a process that might be seen to be complex by the majority of the people. For this reason most organisations will plan to buy some costly software and pay for use it (Hansen et al., 2003).

Another possible issue with ABB is that it normally needs train a lot of people in company. In order for ABB to operate effectively, each manager of unit must know this method. If not, ABB will not work (Hansen et al., 2003).

Conclusion

Even though traditional budgeting has been criticised is still widely used. Looks like majority of the organisations are not considering to stop it. Frustration with budgeting is seen on two fronts: some intend to throw away traditional budgeting and some who want to upgrade it. Budgets are useful for planning, synchronising and appraisal of actions, motivation and assessing of employees performance, for assisting the internal control of the companies. The number of organisations that use budgets are extremely high, approximately 90% in developed and rising economies (Goode and Malik, 2011; Pietrzak, 2013).

In 2006 Dugale and Lyne examined management of 40 UK based firms and discovered that budgeting is active and very healthy. The greater part of questioned managers backed the important role of the budgets which has been used for planning, control, performance appraisal, coordination and communication. In addition they argued that budgeting steered to dysfunctional performance or has no value, more than 50% stated same changes in the traditional budgeting and better financial control in the last decade.

This can led to conclusion that traditional budgeting systems will continue to be use as they get significant value, they will be improved by users to better suit current business world (Libby and Lindsay, 2010).

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