Zero Based Budgeting vs Incremental Budgeting

This article compares Zero Based Budgeting and Incremental Budgeting, two different approaches to budgeting. It discusses the advantages and disadvantages of each method and how they can impact an organization's financial planning. It also explains the process and benefits of Zero Based Budgeting and the simplicity and flexibility of Incremental Budgeting.

QUESTION 1
a.
Lipstick Lip balm Lip gloss
Production Units 30000 35000 3000
Sales price 22 26 24
Material cost per unit 5 10 10
Labor hours per unit 3 Hours 2 Hours 2 Hours
Overhead for period were as
follows:
Set up cost 120000
Receiving 30000
Dispatch 15000
Machining 65000
Cost drive
Lipstick Lip balm Lip gloss
Machine hour per unit 4 4 4
Number of set ups 10 14 1
Number of deliveries received 10 10 2
Number of orders dispatched 20 20 10
b.
Overheads for period were as
follows:
Set up cost 120000

Receiving 30000
Dispatch 15000
Machining 65000
230000
Total labor hours
Lipstick Lip balm Lip gloss
Production Units 30000 35000 3000
Labor hours per unit 3 Hours 2 Hours 2 Hours
Total labor hours 90000 70000 6000
Total labor hours Production*labor hours
OAR
Total overheads/total labor
hours
230000/16000
1.38 per labor hours
Labor cost per unit Labor hours*Labor paid
Lipstick 15
Lip balm 10
Lip gloss 10
Lipstick Lip balm Lip gloss
Sales price 22 26 24
Direct cost
Material cost 5 10 10
Labor cost per unit 15 10 10
Prime cost 20 20 20
Overhead cost 4.14 2.76 2.76

Total cost per unit 24.14 22.76 22.76
Profit -2.14 3.24 1.24
Lipstick Lip balm Lip gloss
Machine hour per unit 4 4 4
Production Units 30000 35000 3000
Total machine hours 120000 140000 12000
OAR
Machining/Total machine
hours
65000/272000
0.238
Lipstick
Lip
ba
lm
Lip
gl
os
s
Tot OAR/Cost
driver
Setup 10 14 1 25 120000/25 4800
Deliveries
received 10 10 2 22 30000/22
1363.
6
3
Orders
dispatched 20 20 10 50 15000/50 300
Overhea
ds Appropriation
OAR/cost
driver Total
Lipstic
k
Lip
bal
m
Lip
gl
os
s
Set up
cost Number of set ups 4800 120000 48000 67200 4800
Receivi Number of deliveries 1363.63 30000 13636. 13636.3 2727.2

ng 36 6 7
Dispatc
h
Number of orders
dispatched 300 15000 6000 6000 3000
Machini
ng Machine hours 0.238 65000 28560 33320 2856
Total
96196.
36
120156.
36
13383.
27
Number of
units 30000 35000 3000
Overheads per
unit 3.2 3.43 4.46
ABC method Lipstick Lip balm Lip gloss
Sales price 22 26 24
Direct cost
Material cost 5 10 10
Labor cost per unit 15 10 10
Prime cost 20 20 20
Overheads 3.2 3.43 4.46
Total cost per unit 23.2 23.43 24.46
Profit per unit -1.2 2.57 -0.46
ABC VS Absorption Lipstick Lip balm Lip gloss
ABC Profit per unit -1.2 2.57 -0.46
Absorption Profit per unit -2.14 3.24 1.24
ABC VS Absorption Lipstick Lip balm Lip gloss
ABC
Overhead
cost 3.2 3.43 4.46
Absorption Overhead 4.14 2.76 2.76

cost
(C.)
From the calculations which are views for this it views the two methods which includes
various approach, costs per unit. There are the difference for profits for absorption cost. Profit
per unit for three items which includes all overheads for the basis for labour hours are 4.14, 2.76
, 2.76 respectively while the activity based costing which views profits are 3.2, 3.43, 4.46.
This calculation views the two approaches contains various categories for goods, their
quantities. As there are specific amount for demand. The value for absorption for three goods are
235301, 288012, 18686. The cost for per units earns for ABC are 3.2, 3.43, 4.46 aggregate.
Absorption costs shall takes consideration for production expenses which includes fixed
overhead costs, warehouse leases, utility costs for the factory. It covers various costs which
includes materials includes direct labour, expenses which includes wages for the manager. This
helps for assess the appropriate sale price for the items. The absorption costing requires the
allocation for fixed production overheads for the expense for product, this not helps for product
decisions. Absorption costing gives valuation which are weak for actual costs for making the
items.
Activity based costing are the technique for more accurate distribution for overheads
costs for the attributing these for activities. The costs allocation for the activities, the costs which
are allocated for costs objectives which utilise the activities. The framework should use for
minimise overhead costs for the integrated way. ABC functions are complicated for where there
are the various devices, goods, tangled systems which just are not easy for figures. This not the
value for simplified setting where manufacturing cycles are shorten. There are various useful
applications for information which are providing for ABC systems. This detail are when
assessable when its builds the method which includes the particulars collection for details for
every decision. When entity install the standardise ABC framework, it using for decisions which
will find its not has data which needs for it. The structure process are decided for cost benefits
study for which choices for endorse, the cost for system are worth benefit for information which
results for its. The analysis views activity basis method which are useful for business for
comprehensive analysis which helps for profitability for the businesses.
(d). How sensitivity analysis helps managers to cope with uncertainties:

Sensitivity analysis are employed for determine the response for model outcomes for
shifts for input details. Predictions are potential cash flows which depends highly for future
predictions, future revenue levels, payment behaviours. The flaws for these calculations affects
the necessary for the prediction. Sensitivity analysis has aims for classify assumptions which has
necessary effects for predictions. They should has the subject for management concern.
Sensitivity measurement are easy for using financial analysis, spreadsheet kits. The sensitivity
analysis explains which views various values for independent variables affects the factor.
Sensitivity evaluation are element which explains how the target parameters are influence for
external ambiguity which known for input considerations. This method are classifies for the
calculation it’s the way for eliminating the outcome for case depending for the various
parameters. The analytical technique for evaluate variable differences which influence for
creating the series for variables. The qualitative variables evaluated for when the sensitivity tests
performs for higher profitability for the businesses. The observer investigates the specifications,
how the signals influence the objectives for higher profitability for the businesses.
QUESTION 2
(a) Calculate the following variances for the last month:
(i) the material usage variance for each ingredient and in total
Should use
(KG)
Did use
(KG) Difference(KG)
Standard
cost/kg
($) Variance($)
Alpha 1840 2200 360A 2 720A
Beta 2760 2500 260F 5 1300F
Gamma 920 920 1
5520 5620 580F
(ii) the total material Mix variance.
AQSM AQAM Difference(KG)
Standard
cost/kg
($) Variance($)
Alpha 1873.33 2200 326.67A 2 653.34A

Beta 2810 2500 310F 5 1550F
Gamma 963.67 920 16.67F 1 16.67
5620 5620 913.33F
(iii) Yield variance
SQSM AQSM Difference(KG)
Std
cost/kg
($) Variance($)
Alpha 1840 1873.33 33.33A 2 66.66A
Beta 2760 2810 50A 5 250A
Gamma 920 936.67 16.67A 1 16.67
5520 5620 333.33A
Alternative solution:
5,620 kg input should produce 4,683·
33 kg of Omega 5,620 kg input did produce 4,600 kg of Omega
Difference = 83·33kg x $4 per kg ($400/100 kg) = $333·32 A
(b) Discuss the problems with the current system of calculating and reporting variances for
assessing the performance of the production manager.
The raw material price variances views the analysis are outside for scope for the
manufacturing manager’s responsibility for purchasing managers. The company’s production
manager are not interested for establishing the regular blend. It is demotivating for keep
management responsible for variations which they are not monitor. price level for three materials
for variable, the use for ex ante prices use requirements which offers the skewed views for
mixing variations.
Kappa Co are currently has reviews, there are the lack for true image for the success for
company’s production manager. There are still no follow up for analysis variances. The Kappa
Co not seems for the much variations, production manager which are not able for monitor costs
which are complacent which are affects the Kappa’s business.
There are relation for material mixture variation, material yield variation, the use for
combination for materials which has various standards has analysis for savings for $913.33. it

has analysis for Kappa which has standard mixture for material conform which helps for better
performance which helps for higher profitability for the businesses. It views the variances for the
company which helps for the better utilisation for its resources which helps for higher
profitability for the businesses.
QUESTION 3
Zero based budgeting, incremental budgeting for the company:
Zero based budgeting
It involves to prepare the budget from the collect with a zero base. It is a method of budgeting
where all the expenses for a new period are measured on the actual basis not on the differential
basis. In this, every state needs to be justified by justify the revenue that every cost will generate
for the company. All the managers are compulsory to confirm all budgeted expenses, not just
changes in the previous year. Zero based budgeting is more flexible and can be applied to all
kinds of costs like operating expenses, marketing costs, cost of goods sold etc.
Advantages:
 To check the accuracy of budgeting whether any changes to the previous year budgets
and re-look of each and every item in the cash flow. This helps in cost reduction as it
gives the clear image of costs.
 This helps in efficiency allocation of resources is to maximize the profitability of the
organization and raise the wealth of the shareholders. It ensures that the resources are
allocated efficiently and effectively.
 It gives the actual clarity into your organization that allowing to provide strong leadership
and visual image.
 It also improves the coordination and communication within the division and to motivates
the employees for involving in the decision making.
 Due to technological changes, with the new process or attractive changes, the
fundamental assumptions are also changed. Zero based budgeting react the changes in the
organisation.
Disadvantages:
 It is a time consuming process because require more time for a team to complete.

 Organizations do not always stick to budget in every situation. Sometimes it may be
arise which lead the management to obtain the expenses of the unexpected possibility.
 Each and every cost is a difficult task and it requires the managers training.
Incremental Budgeting
This type of budgeting is based on the new budget that can be prepared by making some minimal
changes to the current year's budget. Incremental budgeting approach is mainly adopted by those
companies whose management is not supposed to be a consume a great time and those who do
not have a limited resources to develop the budget.
Advantages:
 This type of budget is very simple to understand compare to other budgets because it
does not require the complex calculations.
 Many companies used this technique of budgeting because is to help destroy competition
or construct a value of equality among departments as all departments are given a similar
amount of money of gain over a previous year.
 This process does not require any detailed analysis so it is easy to implement why
companies adopt this type of budgeting during the preparation of budget.
 This type of budgeting is very flexible because they allow to see changes very quickly
when you implementing a new policy or prepare a new budget.
Disadvantages:
 Incremental budgeting needs additional financial resources which puts pressure on each
department for funding their operations. So, department will try to spend as much as
money they can possibly assure that they get a related amount for the next plan.
 According to this budgeting, if any slight changes in budget allocations for preceding
period, it expect that method of working will remain same. This may lead to the lack of
innovation and reduce the costs.
 Incremental budgeting cause allocation of resources to various departments even if they
do not require them for upcoming years. Since funds are assigned in one of those years,

this type of budget allocate similar amounts for further years thereby it cause a wastage
of resources.

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