Disadvantages Of Activity Based Budgeting

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Activity Based Budgeting Traditional approaches to budgeting are effective for unit level activity costs where the consumption of resources varies proportionately with the volume of the final output of products or services. However for those indirect costs and support activities where there is no clearly no defined input-output relationship and the consumption of resources does not vary with the final output of products or services, traditional budgeting approaches merely serve to authorise levels of spending for each budgeted item of expense. Activity budgeting approach demonstrates an activity based costing approach to the allocation of costs. The main aim of this approach is to more accurately identify product costs where the production…show more content…
Zero Based Budgeting Zero-based budgeting is the form of budgeting process which starts from a base of zero with no reference being made to the prior period 's budget or performance. Every department function is reviewed thoroughly; with all expenditure need approval, rather than just incremental expenditure requiring approval. ZBB involves three main stages: Activities are identified by managers, this is known as 'decision package '. This decision package is prepared at the base level, showing the minimum level of service or support needed to achieve the organization 's objectives.  Management will then rank all the packages in the order of decreasing benefits to the organization. It makes easy for management to decide what to spend and where to spend.  The resources are then allocated based on order of priority up it the spending level Rolling Budget The budgeting approach in which the annual budget is broken down into months for the first three months, and into quarters for the rest of the year. With new quarter being added as each quarter ends, also known as contiguous…show more content…
This mean that existing operations and the current budgeted allowance for existing activities are taken as the initial point for preparing the next annual budget. During the budgeted period the base is adjusted due to changes in product mix, Volumes and price. For example, the allowance for budgeted expenses may be based on the previous budget allowance plus an increase to cover higher prices caused by inflation. The major advantage of the incremental approach is that most of the expenditure that are associated with the base level of an activity remains
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