Question

Compare and contrast the following styles of budgeting:   line-item budgeting, performance budgeting, program budgeting, functional budgeting, and zero-base budgeting. What are the strengths and weaknesses of each?

Answer 1

Line item budgeting.

Line-item budgeting offers decision-makers an incremental, or step-by-step, approach to budgeting. Budget makers can use a line-item budget to make specific decisions, such as changing funding levels of programs being phased out to provide money for new programs or making cuts to budgeted expenses because of changes in organizational policies..

Strength:-Easy to Make, Flexible control, Control on small expenses.

Weakness:-Difficult to adjust.

Performance budgeting

Performance budgeting is a method of budgeting that provides the purpose and objectives for which funds are needed, costs of programs and related activities proposed to accomplish those objectives and outputs to be produced or services to be rendered under each head. It shows the budgeting based on performance.

Strentgth-Higher transparency and accountability,informed budgetary decision-making

Weakness:-A shortcoming of a performance budget occurs if the budget document is unchanging for the whole financial year.

Functional Budget

The budget prepared for the cost and income plan for a particular process or department operating within a business. For example, a functional budget for the manufacture of a product line might include estimated costs of production, marketing, sales, labor, equipment and materials, as well as projected sales income.

Strength:-Focus on a particular Function and helps to control expected costs.

Weakness:-Managers may set targets which are easy to achieve to reduce pressure from them

Zero base Budgeting

This kind of budgeting helps the management to avoid traditional expenditures which are no longer required. As the base is zero, management can actually give a new thought to each and every item of expense and reassess the requirement or possible cost saving. This is the best kind of budgeting among all.

Strength-The managers shall be motivated as the ownership of budget is in their hands.Managers will be more committed towards the organization and targets set by them as they are the owners of the same.

Weakness:-Budget may not be at par with the overall objective of the organization as it was been prepared by the managers on the business unit level.Managers may set targets which are easy to achieve to reduce pressure from them.