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Chapter 3

3.2 Incremental budgets, zero-based budgets (ZBB) and rolling budgets

Type of budget Suitability Advantages
Incremental – starts with the  Stable business  Quick, low cost and easy
previous period’s budget or  Good cost control  Managers not
actual results and adjusts demotivated by targets
these by an incremental  Limited changing regularly
amount to cover inflation or discretionary costs
other expected changes  Fine if historic figures
accurate

ZBB – each element of the  Fast moving  Inefficient/obsolete
budget is justified as if the business operations identified and
activity to which the budget  Historic figures removed
relates is being undertaken inaccurate  Better resource allocation
for the first time
 High discretionary  Involvement of managers
ZBB stages:
costs improves knowledge and
1 Managers identify  Public sector motivation
activities that can be organisations  Responds to changes in
individually evaluated
the business
2 The costs and benefits of environment
each activity are included
in a decision package

3 The activities are ranked
4 Resources allocated to
various packages
Rolling – the budget is kept  Fast moving  Budgeting and control
continuously up to date by organisation should be more accurate
adding another accounting  New business  Managers take budgeting
period (e.g. month/quarter) process more seriously
when the earliest accounting  Any organisation
period has expired that needs cost
control

Illustrations and further practice

Now try TYU question 5 from Chapter 3 of the Study Text

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