Management and Cost Accounting
The zero based budgeting system holds the following advantages derived from its implementation: By requesting that all expenditure is justified it is a good measure in identifying inflated budgets. The pressure exerted from zero allowance on costs drives operational management to seek the most effective methods to enhance their efficiency in the day-to-day running of the department they are in charge in. Good method of identifying the output of service departments, which is normally complex to note. Aid in the allocation of the organization’s resources because they are distributed in line with the value added to the firm.
Motivates employees by involving them more in the decision-making process, thus stimulating their initiative. Useful in diminishing wastage in the company. Points out opportunities for outsourcing. Ensures more adherences to the mission statement and corporate objectives of the company enhancing in goal congruence. The advantages of the traditional budgeting system, which all differ from the former method, are: The system is not complex and is easily to operate and quickly understood by management and staff. The functional budget is fairly stable and is changed gradually.
A consistent approach can be adopted by management in the planning function. Departmental conflicts are diminished since a common approach is adopted in treating the different sections. As one can note in this sub-section, certain disadvantages in one method are an advantage in the other due to the different premise they are based on. This mainly applies to the disadvantages number A, B and D in zero based budgeting, which coincide with the benefits A and D of the traditional technique. It is also applicable to limitations B and C of traditional budgeting, which are related to advantages B and E in the zero based budgeting scenario.
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The limitations of zero based budgeting are: It is very complex to define and identify decision units and packages leading to considerable work in such facet. The need to justify each expenditure may result in conflict between departments since in some sections value added derived is more difficult to note or less appreciated by management. For instance research and development department will be threatened, while the production department will be favored. Information overflow will arise in large corporations leading to neglecting critically important details. Operational management need to be trained since the method is elaborate.
Difficulty may thus be encountered in communicating and administering this technique due to such feature. The disadvantages of the traditional system comprise: The presumption that activities will continue working in the same manner taken by the traditional system does not hold in practice. Operational managers and employees are not induced to diminish costs and develop new innovative ideas. Promotes spending on the budget in order to keep the budget level in the next year. The elements in the functional budget may become outdated and mislead management in their decisions.
Since this year budget is based on the budget of the previous year, the same priorities for resources are used, which may not be the case due to changes in the internal and/or external environment.
Drury C. (1996). Management and Cost Accounting. Fourth Edition. London: International Thomson Business Press. Lucey T. (2003). Management Accounting. Fifth Edition. Great Britain: Biddles Limited. Wikipedia (2006). Zero Based Budgeting (on line). Available from: http://en. wikipedia. org/wiki/Zero_Based_Budgeting (Accessed 12th June 2007).