FIXED AND FLEXIBLE BUDGETING

FIXED BUDGET; A BUDGET WHICH IS DESIGNED TO REMAIN UNCHANGED IRRESPECTIVE OF THE LEVEL OF ACTIVITY ACTUALLY ATTAINED. FLEXIBLE BUDGET; A BUDGET DESIGNED TO CHANGE IN ACCORDANCE WITH THE LEVEL OF ACTIVITY ACTUALLY ATTAINED.

FIXED BUDGET
A BUDGET PREPARED ON THE BASIS OF FIXED LEVEL OF ACTIVITY IS KNOWN AS FIXED BUDDGET. IT BECOMES AN UNREALISTIC YARDSTICK IN CASE THE LEVEL OF ACTIVITY(VOLUME OF PRODUCTION OR SALES) ACTUALLY ATTAINED DOES NOT CONFORM TO THE ONE ASSUMED FOR BUDGETING PURPOSES.

FLEXIBLE BUDGET
A BUDGET PREPARED IN A MANNER SO AS TO GIVE THE BUDGETED COST FOR ANY LEVEL OF ACTIVITY IS KNOWN AS A FLEXIBLE BUDGET. IT IS PREPARED AFTER CONSIDERING THE FIXED AND VARIABLE ELEMENTS OF COST AND THE CHANGES THAT MAY BE EXPECTED FOR EACH ITEM AT VARIABLE LEVELS OF OPERATIONS. IT IS A SERIES OF FIXED BUDGETS PROVIDING FOR ESTIMATES OF REVENUES AND COSTS AT DIFFERENT LEVELS OF ACTIVITY.

WHERE FLEXIBLE BUDGET IS SUITABLE

1) WHERE SALES ARE UNPREDICTABLE; 2) WHERE VENTURE IS A NEW ONE E.G. NOVELTIES IN THE FASHION; 3) WHERE THE BUSINESS IS SUBJECT TO VAGARIES OF NATURE I.E. SOFT DRINKS; 4) WHERE THE BUSINESS DEPENDS ON ADEQUATE SUPPLY OF LABOUR, WHEN THERE IS A SHORTAGE OF LABOUR;

METHODS OF CONSTRUCTING FLEXIBLE BUDGETS

1.MULTI-ACTIVITY METHOD; 2.FORMULA METHOD; 3.GRAPHIC METHOD

MULTI-ACTIVITY METHOD
IT INVOLVES COMPUTING BUDGET FIGURES FOR DIFFERENT LEVELS OF ACTIVITY WITHIN A RANGE, INVOLVING FOLLOWING STEPS; 1) DETERMINATION OF LEVELS OF ACTIVITY EXPRESSED IN PRODUCTIN UNITS OR SALES VALUES; 2) FIXATION OF BUDGET COST ALLOWED IN RELATION TO THE LEVEL OF ACTIVITY ATTAINED; 3) DETERMINATION OF DIFFERENT LEVELS OF ACTIVITY FOR WHICH THE FLEXIBLE BUDGETS ARE TO BE PREPARED;

FORMULA METHOD
THIS IS ALSO KNOWN AS THEBUDGET COST ALLOWANCE METHOD. THE TOTAL COSTS AT ANY LEVEL OF ACTIVITY CAN BE COMPUTED ON THE BASIS OF THE FOLLOWING FORMULA; TOTAL COSTS=FIXED COSTS+(ACTUAL UNITS OF ACTIVITY X VARIABLE COSTS PER UNIT OF ACTIVITY)

GRAPHIC METHOD
THE COSTS ARE CALSSIFIED INTO FIXED AND VARIABLE ELEMENTS . ESTIMATES ARE THEN MADE FOR DIFFERENT LEVELS OF ACTIVITY. THE DATA ARE THEN PLOTTED ON A GRAPH PAPER SHOWING THE COSTS AT DIFFERENT LEVELS OF ACTIVITY. THE BUDGETED LEVELS OF ACTIVITY ARE SHOWN ON THE HORIZONTAL SCALE AND THE AMOUNTS OF BUDGETED COSTS ARE SHOWN ON THE VERTICAL SCALE. THE BUDGETED COSTS FOR ANY LEVEL OF ACTIVITY CAN BE READ FROM THE GRAPH SO PLOTTED.

PERFORMANCE BUDGETING
PERFORMANCE BUDGETING REQUIRES PREPARATION OF PERFORMANCE REPORTS COMPARING BUDGET AND ACTUAL DATA AND SHOW ANY EXISTING VARIANCES. THE PURPOSE OF SUBMITTING THESE REPORTS IS TO CONVEY PROMPTLY THE INFORMATION ABOUT THE DEVIATION IN ACTUAL AND BUDGETED ACTIVITY TO THE PERSON WHO HAS THE NECESSARY ATHORITY AND RESPONSIBILITY SO THAT HE MAY TAKE NECESSARY ACTION TO CORRECT ANY DEVIATION FROM THE BUDGET.

ZERO-BASE BUDGETING
IT EXAMINES THE PROGRAMME OR A FUNCTION OR A RESPONSIBILITY FROM SCRATCH. THE MANAGER PROPOSING THE ACTIVITY HAS TO PROVE THAT THE ACTIVITY IS ESSENTIAL AND THE VARIOUS AMOUNTS ASKED FOR IN THE BUDGET ARE REASONABLE TAKING INTO ACCOUNT THE VOLUME OF ACTIVITY. NOTHING IS ALLOWED SIMPLY BECAUSE IT WAS BEING DONE OR ALLOWED IN THE PAST.

ZERO-BASE BUDGETING PROCESS

IT INVOLVES THE FOLLOWING STEPS; 1) DETERMINATION OF OBJECTIVES OF BUDGETING SUCHS AS TO EFFECT COST REDUCTION IN STAFF OVERHEADS OR ANALYSE AND DROP PROJECTS NOT HELPING TO ACHIEVE ORGANISATIONS OBJECTIVES; 2) DETERMINATION OF EXTENT TO WHICH ZERO-BASE BUDGETING IS TO BE INTRODUCED I.E. IN ALL AREAS OR SELECTED AREAS; 3) DEVELOPMENT OF DECISION-UNITS SUCH AS A FUNCTIONAL DEPT., A PROGRAMME, A PRODUCT-LINE, ETC. REGARDING WHICH COST-BENEFIT ANALYSIS WILL BE DONE TO ARRIVE AT A DECISION WHETHER THEY SHOULD BE ALLOWED TO CONTINUE OR SHOULD BE DROPPED; 4) DEVELOPMENT OF DECISION PACKAGES I.E. DOING COST-BENEFIT ANALYSIS AND SELECTING BEST ALTERNATIVE. HE PREPATES DECISION PACKAGES SUMMARISING HIS PLANS AND RESOURCES REQUIRED TO ACHIEVE THEM; 5) THE DECISION PACKAGES ARE SENT TO THE SUPERIOR OFFICERS WHO ONCE AGAIN REVIEW AND RANK THEM KEEPING ILN VIEW THE OVERALL OBJECTILVES OF THE ORGANISATION IN MIND. 6) PREPARATION OF BUDGETS BY INCLUDING ALL THOSE PACKAGES WHICH COME WITHIN THE CUT-OFF POINT DETERMINED BY AVAILABILITY OF RESOURCES. THE RESOURCES ARE THEN ALLOCATED TO THE DIFFERENT DECISION UNITS AND BUDGETS RELATING TO EACH UNIT ARE PREPARED;

ADVANTAGES OF ZERO-BASE BUDGETING

1.EVALUATING DIFFERENT OPERATIONS AND PROGRAMMES FOR ACCORDING PRIORITY; 2. PROGRAMMES UNDERTAKEN ARE ESSENTIAL AND ARE BEING PERFORMED IN THE BEST POSSIBLE WAY; 3.APPROVAL OF DEPARTMENTAL BUDGETS ON THE BASIS OF COST-BENEFIT ANALYSIS; 4.IDENTIFYING AREAS OF WASTEFUJL EXPENDITURE AND ALTERNATIVE COURSES OF ACTION; 5.LINKS BUDGETS WITH THE CORPORATE OBJECTIDVES; 6. CAN BE USED FOR INTRODUCTION AND IMPLEMENTATION OF THE SYSTEM OF MANAGEMENT BY OBJECTIVES;

LIMITATIONS OF ZERO-BASE BUDGETING

1.IMPLEMENTATION PROBLEMS AS SUPPORT FROM THE TOP MANAGEMENT IS GENERALLY LACKING BECAUSE OF THE FEAR IN THE MINDS OF TOP MGT. REGARDING IT; 2.DECISION PACKAGES FORMULATION PROBLEMS IN FIXATION OF MINIMUM LEVEL OF EFFORT AND TO IDENTIFY MEANINGFUL WORK MEASURES FOR THE PURPOSE OF EVALUATION; 3. RANKING DECISION PACKAGES PROBLEMS SUCH AS (I) WHO WILL DO THE RANKING;(2)WHAT METHODS OR PROCEDURES TO FOLLOW FOR RANKING;(3)TO WHAT LEVEL DECISION PACKAGES WILL BE RANKED; 4.COST PROBLEMS AS WELL AS THE TIME REQURED. IT NEEDS PROPERLY TRAINED MANAGEMENT PERSONNEL TO DO THE REQUIRED JOB;

CONCLUSION
IMPLEMENTATION PROBLEMS CROP UP ONLY IN THE INITIAL STAGES WHEN THE DECISION UNITS HAVE TO TBE IDENTIFIED AND THE DECISION PACKAGES ARE COMPLETED. ONCE THIS IS DONE AND THE METHODOLOGY IS CLEAR, THE ZERO-BASE BUDGETING BECOMES A ROUTINE TASK FOR THE MANAGERS. THE BENEFITS ARE NUMEROUS.