Question

2. (a) (i) What are the advantages and disadvantages of conventional budgeting versus zero-based budgeting?

(ii) What organizational characteristics create likely candidates for

zero-based budgeting?

(b) (i) What is variance analysis?

(ii) Explain the relationships among the static budget, flexible budget, and actual results.

Answer 1

2 (a) (i)

- Conventional budgeting - less costly to perform, but any inaccuracies and inefficiencies existing in the budget tend to reoccur year after year.

- Zero based budgeting - More time consuming and costly, but produces a more realistic and effective budget.

2 (a) (ii)

• Focus of efforts is on both ‘how much’ a unit will incur and ‘why’ it is incurred?
• Decisions are based on what each unit can offer at the given cost.
• Individual unit’s objectives are aligned with the corporate objectives.
• Instant adjustments in the budget are possible if required.
• All the levels of the organization participate in the process of decision making.

2 (b) (i)

Variance analysis is the quantitative investigation of the difference between actual and planned behavior. This analysis is used to maintain control over a business. Variance analysis is especially effective when you review the amount of variance on a trend line so that sudden changes in the variance level from month to month are more readily apparent. Variance analysis also involves the investigation of these differences, so that the outcome is a statement of the difference from expectations, and an interpretation of why the variance occurred.

2 (b) (ii)

A budget is a plan comprising many line values such as production costs, net profit, production volume, and other factors for a specific period aimed at evaluating performance.

The fundamental differences between static and flexible budgets are that a static budget does not change as volume changes whereas a flexible budget changes line values to reflect the level of activity.

A budget is a plan comprising many line values such as production costs, net profit, production volume, and other factors for a specific period aimed at evaluating performance.

Static budget, the most common type of budget, projects a fixed level of expected input, output, costs of production, and net income before the start of the budgeting period. The values specified in static budgets very often vary from the actual results derived at the end of the budget period