Advantages Of Zero Based Budgeting

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The rise and fall of zero base budgeting and its application for today?s business Executive summary Management accounting is a wide study that views the general aspects of business. These aspects range from the process of setting up an enterprise to reaping the benefits of the investment. One of the aspects there in is budgeting. Budgeting is one aspect that business enterprises employ to minimize costs and hence maximize profits. Various businesses adopt different type of budgets. One type of budget is the zero based budget. This type of budget is preferred by many enterprises that aim at maximizing profits. This type of budget has one wide principle, the more productive a department becomes, the more its budgetary allocations. In this paper,…show more content…
It encompasses systematic analysis and financial forecasts. The forecasts and analysis are based on the application of resources, products and markets. A budget requires the managers to make and it can later be used as a tool for measuring the performance of the operations and the effectiveness of various departments in a firm. There are various approaches applied in budgeting. One of the approaches is the traditional incremental budget and the other one is the zero based budgeting. In the first case just as the name states, the budgetary allocation is done as an increment from the previous period. The traditional incremental budget entails that a department within a firm has access to as much resources as it can spend (Warrick & Zawacki, 1984, p.277). That is to say if a department uses all the financial resources allocated to it, it can apply for more finances to take care of other operations which could otherwise not have been budgeted for. Similarly, if a department realizes that it has some unused resources within a stipulated period, then the managers can look for ways of spending the resources until the accounts read zero. This is a direct converse to the zero based budgeting. In the zero based budgeting, the budgetary allocation for each department is based on the existing operations and the usefulness of the department to the company in question. That is to say the budgetary allocation is not based on the previous…show more content…
Budgets occur in varying natures ranging from those that are static to those that are flexible. Static budgets are easy to work with. However, flexible budgets are more efficient and they ensure that every opportunity is utilized and therefore profits are maximized. Flexible budgets are adopted by many enterprises that aim at maximizing profits. As a matter of fact the overhead allocations applied in a flexible budget help the most vibrant departments of a business to earn more support hence maximizing profits too. It is therefore necessary to look at the merits and demerits of flexible budget on overhead allocations, covering both variable and fixed overhead allocations and explain the relevance of the same for
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