Question

Which one of the below types of budgets do you think works the best? Why would one be better than another?

Incremental budget

Activity-based budget

Value proposition budge

Zero-based budget

Answer 1

Incremental Budgeting

In Incremental Budgeting the figures of each expenditures and income starts with previous years actual numbers and adjusted for inflation, overall market growth and other factors management deems fit. For example in an organization total salary paid to employees in a particular year is $500,000. When the budget is prepared for the next year the management thing that they need five more new employees who will be paid $30,000 each and also an increment of 10 % to existing employees shall be given. Therefore, in incremental budgeting the budget for salary would be Rs. $700,000 ($500,000 + 10% raise to existing employees + ($30,000*5 new employees).

Activity Based Budgeting

Activity based budgeting is a long exercise to find our cost of each and every activity in a large organization and assess the value addition of the same. This exercise also includes alternative procedure to perform the same activity or reaching to the same goal while reducing the cost.

In ABB, budget prepared with the intention to indentify the operations which generate cost to the business and how can be the said cost reduced from the current level.

Zero Based Budgeting (ZBB)

In ZBB, all the numbers reset to zero and given a fresh thought over all the items of budget. The new numbers of every item shall be justified with proper reasoning and shall not be ad hoc figures. This kind of budgeting helps the management to avoid traditional expenditures which are no longer required.

Value proposition budgeting

Value proposition budgeting is really a mindset about making sure that everything that is included in the budget delivers value for the business. Value proposition budgeting aims to avoid unnecessary expenditures – although it is not as precisely aimed at that goal as our final budgeting option, zero-based budgeting.

Zero Based Budgeting is best to another above budgeting method is given. Because Activity-based budgeting (ABB) is a system that records, researches, and analyzes activities that lead to costs for a company. Every activity in an organization that incurs a cost is scrutinized for potential ways to create efficiencies. Budgets are then developed based on these results.

Activity-based budgeting (ABB) is more rigorous than traditional budgeting processes (Incremental budgeting), which tend to merely adjust previous budgets to account for inflation or business development.