zbb vs abb traditional budgeting

8/2/2019 ZBB vs ABB Traditional Budgeting

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ZBB vs ABB

ZBB is Zero Based Budgeting and ABB is Activity Based Budgeting. Both are

different approaches to budgeting and both are applicable to costs that

contain a discretionary element.

The Zero Based Budgeting is a method where all expenses have to be

justified for every new period. The ZBB commences from a Zero base. In Zero

Based Budgeting, all functions in an organisation are analysed for its needs

and costs. After the analysis, the budget would be centred on the needs for

the upcoming period. While doing this, it does not take into account whether

the budget is higher or lower than the previous one.

ZBB can also be termed as a re-evaluation of the program and expendituresof an organisation. When approaching the budget from Zero, the managers of

an organisation have to take into account two types of alternatives: 1. various

ways of carrying out the same activities and (2) various levels of effort in

carrying out the activities.

ZBB is known to be more time- consuming than the other traditional

budgeting.

The Activity Based Budgeting helps in developing accurate budgets fororganisations. The Activity Based Budgeting is a budgeting method where all

the activities that invite cost in all functional areas in an organisation are

recorded and the relationship between them is analysed.

The Activity Based Budgeting aligns all activities with the objectives. The

Activity Based Budgeting also streamlines the costs and helps in improving

business practices. The ABB helps in effective analysiss of the profit potential

of an organisations services and its products. The Activity Based

Budgeting also helps in cost effectiveness by comparing the various activities

of an organisation and by consolidating certain functions.

Summary

1. The Zero Based Budgeting is a method where all expenses have to be

justified for every new period.


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2. The Activity Based Budgeting is a budgeting method where all the activities

that invite cost in all functional areas in an organisation are recorded and the

relationship between them is analysed.

3. In Zero Based Budgeting, all functions in an organisation are analysed forits needs and costs.

4. ZBB can also be termed as a re-evaluation of the program and

expenditures of an organisation.

5. The Activity Based Budgeting aligns all activities with the objectives.

6. The ABB helps in effective analysis of the profit potential of an

organisations services and its products.


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The two dominant forms of budgeting are traditional and zero-based. Business planning is usually

a combination of the two. Traditionalbudgeting is based on areview of historical performance and then the projection of such findings to the future with

modifications. If inflation is high, for instance, cost trends of the last several years are projected

forward but with adjustments both for inflation and for projected growth or decline in business

activity. Historical sales patterns, using established trends in sales growth, are projected; new

sales from planned new product introductions are then added. Zero-basedbudgeting is the

creation of a completely new budget from the ground upas if no history existed. When using this

method, the operation must justify and document every item of expenditure and income anew.

Brand-new operations will utilize zero-based methods.

In government planning, but only very rarely in business,performance budgeting is used as a

third alternative. Under this method, the budget is fixed at the outset. The planning activity is to

determine exactly what activities will be carried out using the allocated funds. Performance

budgeting is sometimes used in the corporate setting when the advertising budget is arbitrarily set

as such-and-such a percent to projected sales. The advertising function then uses performance

budgeting to allocate the budget to various products and media.

CRITIQUES OF THE PROCESS

As early as 1992, the famous guru of management, Peter Drucker, wrote in The Wall Street

Journal: "Uncertaintyin the economy, society, politicshas become so great as to render futile, if

not counterproductive, the kind of planning most companies still practice: forecasting based on

probabilities."

Uncertainty has, if anything, grown since 1992 with the expansion of the Internet, the reality of

terrorism, pressures on hydrocarbon fuels, the threat of global warming, and worldwide epidemics.

In addition to uncertainty, formal budgeting has also come under fire for impeding trust and

empowerment, two new concepts in the evolving corporate culture, as well as for stifling

innovation. As David Marginson and Stuart Ogden recently wrote in Financial Management (UK),

"Budgets have long had a bad press, but they have attracted even more flak recently for being at

best inappropriate to modern business practice and at worst potentially harmful. The Beyond

Budgeting Round Table (BBRT) has been one of their most vociferous critics. It argues, for

example, that the necessary conditions of trust and empowerment in today's organizations are not

possible with budgets still in place, because the entire system perpetuates central command and

control." Innovation is vital for economic survival. But "budgeting stifles trust and empowerment,

according to its critics, which in turn stifles innovation."

The BBRT is an element of The Player Group, a management advisory firm; the Round Table has

29 major corporate members. On its homepage, BBRT advocates a set of principles which include,

among others, continuous planning and controls (rather than an annual budget process), resource

allocation as needed (rather than based on annual allocations and plans), high performance

standards (rather than detailed rules and budgets), and freedom of action by small front-line

teams (rather than direct control of operations from the center).


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The high costs of the budget process and its poor adaptability to stock market perceptions is

another force working to bring about change in the budgetary process as it has been practiced

over the last 50 years or so. An article in The Practical Accountantput the matter as follows, citing

Herman Heyns ofAccenture/Cranfield School of Management: "[T]the budget process is obsolete

given today's economy, resulting in documents that are time-consuming to produce, of little

predictive value, subject to gamesmanship and, quite frankly, out of date by the time they're

implemented." Among the new approaches advocated by Heyns is therolling budget. Under a

rolling budget, performance of the operation over the last 12 months is evaluated on an on-going

basis; projections for the next three months are generated every month.

Budgeting appears to be on the cusp of a change. How long it will take to transform itself is

difficult to predict. In a new book titled Beyond Budgeting, Jeremy Hope and Robert Fraser start

off by sketching the ambivalence felt by top and middle management toward formal, traditional

budgeting. Then they go on: "Though this ambivalence toward budgeting has existed for decades,

the balance of opinion has swung decidedly in favor of the 'very dissatisfied.' Even within the

financial management community, nine of ten have expressed their dissatisfaction, finding thebudgeting process too 'unreliable' and 'cumbersome.'"

The changes, as they evolve, will impact large corporations first and foremost. For the small

business owner, budgeting in the traditional sense will continue to be a sensible, necessary, and

valuable tool practiced, in essence, by examining current resources, eyeing the future, and making

rational allocations for the immediate future.

zbb vs abb traditional budgeting

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