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Financial Management - CMI Level 5 Diploma in Management MAQ
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FINANCIAL MANAGEMENT ASSESSMENTLEVEL 5
Explain different types of budgeting and outline their advantages and disadvantages.
Zero Based Budgeting (ZBB)
Zero Based Budgeting means that no account is taken of past and current information for future
budgeting and planning processes. Therefore, just because something has cost a certain amount, or
occurred during this period, this does not mean that it will happen again or need to be considered for
budgetary purposes.
The advantages of this approach include the ability to start from a clean slate and concentrate on new
objectives, directing funding and budget towards new products or new aims for the organisation.
One of the flaws of this type of budgeting is that it can be very time consuming, as everything needs
to be started from scratch, and no base line of benchmark can be used to give an idea of budget
allocation into certain aspects of the organisation that may be considered as having no altering cost
over time (everything must be justified, rather than being considered as a generic requirement).
Line Item Budgeting
The simplest form of budgeting model to use is Line Item Budgeting. This is simply a list of items
that budget has been considered and allocated for and predicted, against a line of actual costs of that
the products bought or acquired have cost. This gives a very easy quick glance at the difference
between what has been allocated and predicted against actual spending. For future predictions, this
can then have additional columns added to it and past spend compared and future predictions made.
One of the disadvantages of this type of budgeting would be that predictions are not always going to
be accurate and changes could occur in one or several predicted costing areas that will not have been
planned for, or may provide inaccurate predictive data for future planning purposes.
Program Budgeting
Program Budgeting is similar to Line Item Budgeting but takes the dimension into a second axis,
adding to it individually contained Cost Centres, that are controlling parts of the budget and
spending can be individualised and more closely scrutinised from a lower level. A disadvantage of
this type of budgeting is that it is more difficult to analyse year on year spending across the
budgetary Cost Centres, than in comparison to a Line Budget. An advantage to this type of
budgeting is that the individual costs of items within each area of business can be identified more
easily and investigated.
Source: http://www.businessstudiesonline.co.uk/AsA2AppliedBusiness/TheoryNotes/
Unit2/2_3_Financial_Management_in_Business/PDF/03%20Budgeting.pdf
Source: http://www.cipfa.org.uk/pt/download/zero_based_budgeting_briefing.pdf
Source: http://compsoc.dur.ac.uk/~ag/FinMgmt.doc
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, What steps should you consider when constructing a budget for your own workplace area?
Purposes of budgeting:
The following steps should be considered when constructing any budget and encompass all
aspects that are important to the successful allocation of funds, implementation and management
of the budget throughout its life cycle:
Planning
The budget is a useful way of setting out in detail the planned activities of the organisation
for the coming period and relating them to the objectives of the organisation.
Resource Allocation
The budget can be an instrument by which a fair and efficient allocation of resources may
be achieved. Without a coherent budget resources may be allocated indiscriminately with
consequent detrimental effects on the organisation as a whole.
Co-ordination
A carefully prepared budget should help to co-ordinate the organisation’s activities and
resources.
Control
The budget is vital in comparing actual performance to planned performance and enabling
corrective action to be taken when deviations occur.
Communication
Budgets have an important part to play in the communication of objectives, targets and
responsibilities throughout the organisation.
Motivation
By setting challenging but realistic targets, well designed budgets can play a significant
part in motivating managers. The targets must be clear and achievable, and the manager
should participate in setting his or her own budget.
Performance Evaluation
The budget gives senior management a means of judging the performance of their teams. It
must be remembered, however, that adherence to the budget alone cannot measure all
aspects of a manager’s performance.
Budget Planning
In order to carry out budgetary control, it is necessary to formulate a fully co-ordinated
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