Question Tag: Finance for Non-Accounting Managers

MEMORANDUM
To: Sales Director
From: Technician Student
Re: Accounting Terminology
Date: X/X/XX

Management accounting can provide information for managers to support decision making, planning and control within an organisation. You have been introduced to a number of management accounting theories and related terminology. This paper aims to provide further information and explanation of a number of key terms.

Activity Based Budgeting
Is a method of budgeting in which the activities that incur costs in every functional area of an organisation are recorded and their relationships are defined and analysed. Activity based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period’s budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides opportunities to align activities with objectives, streamline costs and improve business practices.

Zero Based Budgeting
Traditional budgeting approaches are not always clearly linked to strategy and are focused on financial aspects only. In this scenario, the annual budget uses an incremental approach whereby increases and decreases are applied to previous outturn positions. In contrast, Zero based budgeting supports a more innovative approach, requiring managers to justify all costs as if the proposals were being considered for the first time. This approach is focused on opportunity costing and can eliminate inefficiencies, however, it can be quite complex and time-consuming to administer.
A definition of zero based budgeting provided by CIMA is ‘a method of budgeting whereby all activities are re-evaluated each time a budget is formulated. Each functional budget starts with the assumption that the function does not exist and is at zero cost. Increments of cost are compared with increments of benefit, culminating in the planning of maximum benefit for a given budget cost’.
An example of zero based budgeting:
It is proposed to increase the maintenance budget by 20% to take account of the age of some equipment and other inflationary factors. Due to zero based budgeting analysis, it is identified that a particular machine, which costs €/£8000 to maintain is only used once per quarter. An alternative outsourcing option has been identified and the budget adjusted accordingly.

Rolling Budgeting
Is one that is revised at regular intervals by adding a new budget period to the full budget as each budget period expires. A budget for one year, for example, could have a new quarter added to it as each quarter expires. In this way, the budget will continue to look one year forward. Cash budgets are often prepared on a continuous basis.