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Tuesday 12 April 2011

Budgetary Control

Budget Ratios:-

1) Capacity usage Ratio
= . Budgeted Hours . * 100
Maximum possible working hours in budget period

2) Standard Capacity Employed Ratio
= Actual Hours Worked * 100
Budgeted hours

3) Level of Activity Ratio
= Standard Hours for Actual Production * 100
Standard Hours for Budgeted Production

4) Efficiency Ratio
= Standard Hours for Actual Production * 100
Actual Hours

5) Calendar Ratio
= Actual Working days * 100
Budgeted working days

Zero Base Budgeting:

The name zero base budgeting derives from the idea that such budgets are developed from a zero base: that is, at the beginning of the budget development process, all budget headings have a value of ZERO. This is in sharp contrast to the incremental budgeting system in which in general a new budget tends to start with a balance at least equal to last year's total balance, or an estimate of it.

Definition of Zero Base Budgeting (ZBB)

“A method of budgeting whereby all activities are reevaluated each time a budget is set. Discrete levels of each activity are valued and a combination chosen to match funds available”.






Objectives and Benefits of ZBB

What zero base budgeting tries to achieve is an optimal allocation of resources that incremental and other budgeting systems probably cannot achieve. ZBB starts by asking managers to identify and justify their area(s) of work in terms of decision packages (qv).

An effective zero base budgeting system benefits organisations in several ways. It will

• Focus the budget process on a comprehensive analysis of objectives and needs
• Combine planning and budgeting into a single process
• Cause managers to evaluate in detail the cost effectiveness of their operations
• Expand management participation in planning and budgeting at all levels of the organisation

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