Traditional and Alternative Budgeting Approaches for VisionMix Plc

This article discusses the purpose and process of preparing budgets, application of traditional budgeting on VisionMix Plc, and evaluates alternative budgeting methods such as zero-based budgeting, rolling budgets, and activity-based budgeting. It also evaluates the applicability of these methods to VisionMix Plc.

Business Finance
MOD003319
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Part 1: Traditional Budgeting Approaches
Executive Summary
The purpose of this part of assignment is to analyse the purpose and process of preparing
the budgets and budgeting process can be helpful developing the business model. This part also
explains application of traditional budgeting/incremental budgeting on the given scenario of
VisionMix Plc. After analyzing the application of traditional budgeting on VisionMix Plc, it has
been evaluated the applicability of traditional budgeting system on all or any part of the business
as per future requirement of the business.
Section (i): Purpose & Process of Preparing a Budget and the use of Budgeting process in
developing business model
‘Budget’ can be described as method of developing the financial forecast by a company
in order to develop an estimate of the future income and expenses within a given period of time.
It can be described as a financial plan that is developed for a specific period of time for planning
the future organizational goals and objectives regarding the planned sales, revenue, costs,
expenses and cash flows. As such, the main purpose for developing a budget is to develop a
measurement tool for having a visual depiction of the future sales and expenses in order to
develop effective strategies for reducing business expenses and increasing its profitability
position.
The company need to adopt the following steps for developing a budget as stated as
follows:
 Developing the budget: This step involves the selection of the type of budget to be
prepared by the financial manager such as zero-based budgets and traditional
budgets. The selection is done on the basis of the type of estimate to be determined
by developing the budget such as forecasting the future sales or monitoring the costs.
The type of budget selected to be prepared depends mainly on the fiscal targets to be
achieved (Haerifar, 2012).
 Allocation of Resources: This is the second step in the method of budget preparation
after determination of the type of budget to be developed. The resources allocation
should be done on the basis of financial targets and policies that help in achievement
of determined targets. The resources allocated should be done in a manner that leads
to maximizing the operational efficiency and helps in attaining the determined goals
and objectives.
 Evaluation and Monitoring of Budget: The successful implementation of budget
developed depends on its continuous monitoring and evaluation for ascertaining that
the target determined are effectively achieved. The budget monitoring should be done
on the basis of linking the budget developed to the forecasted aims and objective to
be attained. The continuous evaluation of the budget effectiveness will help in
identifying the loopholes in advance so that measure could be developed in advance
for attaining the determined targets.
The most significant use of budgeting process can be stated to be in the development of
business model. Business model can be defined as the plan developed for successfully carrying
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out business in the future context by identification of its potential source of revenue and thus
assessing the future growth and development of the company. As such, the process of budgeting
helps in creation of business model by development of a structured plan for carrying out daily
and future business activities. Thus, the development of a budget helps the business managers in
structuring the future growth plan of the company by taking decisions relating to the assets that
are worthy of investing. Budget helps in developing the conceptual structure of a business model
by determining the viability of a company and explaining the ways of carrying out operational
activities in future direction as per the intended framework of business developed through
business model (Shim, Siegel and Siegel, 2011).
Section (ii): Application of traditional budgeting approaches in the given business scenario
VisionMix Plc is currently using traditional budgeting method to prepare its budgets for
every department. Under traditional budgets there are various methods that can be used but
VisionMix Plc can apply only incremental budgeting approach as this company is already
established company with many departments and there are certain changes that need to be made
in the current year in respect to previous year. VisionMix Plc has currently operating at location:
headquarter at Bath and design & manufacturing operations in Hereford. At headquarter main
functions such as management, sales, HR and finance are being carried out. In coming budgeting
year company is expecting some new products and also a new manufacturing facility to maintain
the supply of goods. Using traditional budgeting together with incremental budgeting will help
the company to consider all the new additions in the budgets as incremental budgets uses past
year data with addition or subtracting any changes for the budgeting year (Dugdale and Lyne,
2010).
Incremental budgeting can be applicable only when there are minor changes in the
existing budget. In incremental budget only the incremental values are added to arrive at the new
budgets numbers. There is assumption that all the departments in the company will continue to
operate at the existing level and if any addition is required it is performed as per the
requirements. In case of VisionMix Plc there is no change in number of departments, only there
is requirement to add the products to the existing budgets. As such there is no fixed standard
method to arrive at the incremental budgets but there is an approach that needs to be followed. It
can be understood through application of incremental budgeting in VisionMix Plc through an
example. In an example, it is important to consider how the products and processes of
VisionMix will be accounted for. In the coming budgeted year, there will be addition of new
products, so while preparing the budgets through using the incremental budget existing variable
cost expenses of old products will allocated as it is and variable cost expenses of new products
are estimated on the basis of new information gathered for such new old products. The problem
will arise while allocating the fixed cost to the existing products and to new products. To make it
is simple it will be easy to choose a common base of allocation of fixed cost under old and new
products. In this way existing budgeted data has been used to allocate the cost to old as well as
new products (Dugdale and Lyne, 2010).
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Section (iii): Evaluating whether traditional budgetary systems is appropriate to all or any
part of the business as the planned future form
This section of the assignment will evaluate applicability of traditional budgetary
systems on the company ongoing budgetary process as well as on upcoming future project.
Currently company has been using traditional budgets through applying incremental approach as
they have limited resources to be allocated but as per the future expansion plan of the company it
is not viable to apply traditional budgetary method. It is because traditional budget is successful
when resources are allocated to limited activities and few process are there but when they are
multiple departments with large quantity of products it is not feasible to use traditional
budgetary method. So it is important to discuss the advantages and disadvantages of traditional
budgetary method to check the feasibility of application of traditional budget on VisionMix Plc.
The incremental budgeting is easy to implement as it does not require any complex
calculations. Through using the incremental budgeting there is no requirement to ensure about
the continuity of funds as incremental budget consider previous budgets as their base and
formulate entire budget upon that. Incremental budget does not show large deviation in
budgeting figures year after year as it takes into account the changes every year. Incremental
budgeting is suitable for the companies that have fixed funding requirements with very little
deviation. The use of traditional budgets helps to promote decentralization within the
organization as role of top management slowly got reduced to certain level as all the thing
remain same year after year (Bogsnes, 2016).
It is very hard to introduce the change in the business strategy as traditional budgets does
not easily adopts the changes and there is very high cost involved in changing the process. Under
traditional budgets reviews are not conducted regularly that ignores any major variation in
budgets resources and required resources. During the budgeting period it is not possible to make
changes in budgets that will discourage management to look forward to introduce the new
process and new product in between the budgeting period. This is the reason why traditional
budgeting process cannot be helpful for introducing new process and new products within
VisionMix Plc (Bogsnes, 2016).
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Part 2: Alternative budgeting methods
Executive Summary
This part will evaluate the different alternative method of budgeting such as zero based
budgeting, rolling budgets and activity based budgeting. In addition to this applicability of all
the alternative methods has been evaluated in detail to make recommendation of best alternative
method or methods is most suitable for VisionMix Plc.
Section (i): Understanding of alternative budgeting methods: Zero Based Budgeting,
Rolling budgets and activity based budgets
Zero Based Budgeting: Zero based budgeting is type of budget process that involves preparing
the organization budgets from scratch ie with zero base. All the resources are re-allocated after
evaluating each line item of cash expenses to be incurred in type of expenses. This budgeting
method does not use past year budget data to prepare the current budget. As per the zero based
budgeting method all the expenses of new period are allocated on the basis of actual expenses
that has to be incurred. This budgeting method does not consider differential basis as under this
method all the resources are allocated on completed new basis. Each activity defined under this
method is been justified and revenue generated by each type of cost expenses are explained in
detail. Zero based budgeting starts with the identification of every task and finding the ways to
accomplish the tasks. All the solutions are being evaluated and all the alternative sources of
funds are being checked to prepare the budgets on the basis of priority.
Zero based budgeting is superior to the traditional budgetary method as it increases the
accuracy through analyzing each department and checking every item of cash flow and
computes all the costs again. In other words, it helps in cost reduction as it provides the clear
picture of the costs as against the desired performance. Through using the zero based budgeting
it is highly efficient to allocate the resources to each department as it takes into account the
actual values and completely ignores the historical values. Activities that do not provide any
outcome and are useless can be terminated easily under zero based budgeting method. It
certainly improves the traditional method of budgeting as it overcomes the weakness of
incremental budgeting (Ward, 2012).
Rolling Budgets: Rolling budgets can be regarded as continuous budgets as in this method next
year budgets are added when previous accounting period budgets comes to an end. It goes
endlessly through making the required changes in new accounting period budget. Generally in
rolling budgets, accounting period is kept for a quarter or month instead of a year. Rolling
budgets are tie consuming as it is the extension of previous budget. It requires more efforts to
update and to implement in comparison static budget. This budgeting system uses incremental
approach to prepare the budgets as it new budgets is in continuation of previous budgets. While
drafting the budgets of new products previous assumptions are not considered as there requires
fundamental changes to the assumptions before making budgets for new products or process.
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Rolling budgets certainly improves the traditional budgets as traditional budgets are
prepared for one year not updated during one accounting cycle but rolling budgets are updated
on monthly or quarterly basis. Under rolling budget method preparation of next year budget start
during the fourth quarter of previous budget as it is continuous process. Improvements can be
made in the rolling budgets and also the assumptions can be modified as per the requirement but
it is not possible under traditional budgeting method (Weston and Brigham, 2015).
Activity Based Budgets: Activity based budgeting is the modern type of budgeting as it uses
activity based costing as the basis of preparing the budgets. Activity based budgeting does not
consider the past year budget data to prepare the current year budgets. Under activity based
budgeting all the activities that incurs cost and has linked with revenue part are analyzed in
detail and on the basis of this analyses resources are allocated to each activity. The purpose of
activity based budgeting is to increase the efficiency in the activities and it also helps to justify
the cost drivers used to allocate the cost.
Among all the budgeting methods, activity based budgets is regarded as modern and
most effective budgeting technique. Through use of activity based costing wasteful activities are
being eliminates and in turns in helps the business to save the costs. In this way business gains
the competitive advantage in the market and resources are allocated in more meaningful manner.
The major improvement in traditional budgeting through using this budgeting technique is that
this method takes business as a single unit not as the separate departments (Brigham and
Ehrhardt, 2013).
Section (ii): Application of alternative methods to VisionMix Plc
Zero based budgeting will more effective in case of Vision Plc as compare to traditional
budgeting as company is going under major changes that requires evaluating each process and
costs in detailed manner before allocation of resources to each activity. For example, when new
products will be added to the existing process and also to the new process, it will certainly
impact the cost structure and to overcome this problem it is highly important to prepare the
budget from the thrash through ignoring the past year data. There is only one problem with zero
based budgeting that it does not allow to modify the budgets after it is being prepared. In case of
VisionMix Plc there is requirement of modify the budgets in between the budgeting period as
company is planning to add the manufacturing unit in some time period and it is most important
factor to be consider (Higgins, 2012).
Rolling budget is most suitable for the VisionMix Plc as it solves the major problem of
company of modifying the budgets as per requirement in between the budgeting period. For
example, when VisionMix Plc add the new products and new process of new manufacturing
department there is need to modify the budgets and it is possible in case of rolling budgets.
While preparation of budgets under activity based budgeting all the steps involved under
each processes are being evaluated and cost driver of each activity is also examined to check the
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overhead rate for per unit of each activity. So it can be said that activity based costing can helps
the VisionMix to make the budgeting process modern through integrating the activity based
costing as the major technique of evaluating the cost structure of company. For example, all the
activities of each department can be re-evaluated and cost driver of each activity can be used as
the basis to allocate the resource in comparison to single rate of recovery of overhead in case of
traditional costing (Kaplan and Atkinson, 2015).
Section (iii): Evaluating whether one of the above method or combination of two or more
method would be most appropriate for the company
On the basis of above analysis of applicability of each of method it can be said that
combination of activity based budgeting method together with rolling budget would be most
appropriate for VisionMix Plc. The main reason to use activity based budgeting is to make the
budgeting process modern through the application of activity based costing and also make best
use of budgets to allocate the resources in right manner. Combination of activity based
budgeting with rolling budgets will surely helps to modify the budgets in between the budgeting
period which is essential requirement for VisionMix Plc.
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References
Bogsnes, B. 2016. Implementing Beyond Budgeting: Unlocking the Performance Potential. John
Wiley & Sons.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage
Learning.
Dugdale, D. and Lyne, S. 2010. Budgeting Practice and Organisational Structure. Elsevier.
Haerifar, P. 2012. Budgeting Process, is it Really Necessary. GRIN Verlag.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Shim, J.K., Siegel, J.G. and Siegel, A.I. 2011. Budgeting Basics and Beyond. John Wiley &
Sons.
Ward, K., 2012. Strategic management accounting. Routledge.
Weston, J.F. and Brigham, E.F., 2015. Managerial finance. Hinsdale, IL: Dryden Press.
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