The budgeting is one of the milestones for the management control of the organizations from all the sectors. Despite of the fact that the budgeting is one of the widely used approach in nearly all of the organizations, there is no perfect method of budgeting until now (Hansen, Otley, & Van der Stede, 2003). Many of the experts and practitioners raise issues related to the use of budgeting as a tool of planning and evaluating the organizational performance. They attribute this fact to the traditional method of budgeting which is accompanied by the top down approach; the command and control concept that are embedded in the planning and evaluation process of the final performance. (Hope & Fraser, 2000, 2003; Ekholm & Wallin 2000; Marcino 2000; Jensen 2001). The practitioners further argued that the budgets are used to allocate the resources of the organization in order to make best use of them and to encourage the myopic form of making dictions and other games related to the dysfunctional budget (Hansen, Otley, & Van der Stede, 2003).

1.The issues associated with the Traditional Budgeting:

The traditional budgeting is the form of budgeting that usually done by following the traditional processes that will be repeated in every year in a same manner, without incorporating any changes or improvements. Especially in public sector organizations of most countries of the world, budgeting is done by repeating the same things that are included in the previous budget as a roll forward of it. The only thing that may be included the aspects related to inflation or deflation based on the information that is available at that time.  This approach uses the large elements relevant to the expenditure and income which are being set by using the parameters of some activities that may undertake (Clark, Gow, Thomson, & Ritchie, 2009).

The universal approach to use the budgeting system because of it capability to make all of the threads of an organization weave together. In this way, the budget provides a comprehensive plan in order to achieve various purposes especially for planning the evaluation of performance. Despite the uses of budgetary control for numerous reasons, the budgetary control especially the traditional method of budgeting is associated with many limitations. One of the limitation possessed by the traditional budget is that it is long established. (Hansen, Otley, & Van der Stede, 2003; Lukka 1988). 

2.Limitations of Traditional Budgeting

According to a recent research study conducted by Neely et al., (2001), there are 12 limitations or weaknesses that are associated with the traditional budgeting method.

 The traditions forms of budget are too much time consuming in order to put them together.

1. Budget creates constrain to responsiveness thus creating a barrier to change.
2.  The traditional budgets are not developed by keeping the view of the strategic focus and even sometime contradicting with the strategic view.  
3. As the preparation of the budget takes a lot of time so, it is unable to deliver value as much as it takes time to be prepared.
4. The purpose of the traditional budget is normally the reduction of cost so, conflicting with the concept of value creation for the organization.
5. The traditional budget involves the top down communication process thus, is strengthening the vertical and strict command and control system.
6. The traditional budgets are normally prepared based on the previous year’s information (Clark, Gow, Thomson, & Ritchie, 2009) so, they are failed to reflect the latest and emerging structures that may be adopted by the organization.
7. The budgets are the source of gaming so, they preserve the behaviors.
8. The changes are modifications in budget cannot be made during a year as they are updated too much infrequently normally at the end of the year.
9. While preparing the budgets through traditional methods, the officials or the other people, developing budget may depend mostly on unrealistic assumptions that sometimes may prove wrong. 
10. The process of budgeting involves only few people so, it creates barrier in the organization rather than enhancing the concept of knowledge sharing throughout the organization.
11. Sometimes, in traditional way of budgeting, it may give with too much importance as the people of the organization may feel that they are undervalued. 

 

At the top of the list, one issue can be looked much prominently that the traditional budgeting is associated with the time constraints as they are too much time consuming to put them together.   

Hansen, Otley and Van der Stede ( 2003) argued that although the budet and budgetry control are the parts of an organizations complex system and the realtiy associated with it but the traditional way of budgeting may work  porperly only in a business environment which is relatveily stable. So, as in the recent years, the bsuiness has become too much dynamic and contnously growing so, it rasies the quaetion that either the traditiional ways of budgetign will work or not? If not then what will be the alternatives to it in order to cope up with the chnaging and dynamic busniess environment.

The current issue that is raised for the traditional budgeting the concern of how to set and control the budget in a dynamic business environment as there are growing changes both inside and outside of every organization. With the changing nature of business in outside of the environment, we need to understand the issues related to budget that may create on the competitiveness of the organization for not coping up with the change.  The traditional sources of budgeting are normally internally focused thus not considering the external factors (Bill, 2007).  

The Contingency theory of budgeting accepted that not only the conditional variables like the emerging technology, the organizational structure and its size but also the impacts created by the outside environment and the accompanying uncertainty (Collier and Berry, 2002).  

Every organization of this modern age needs to interact not only with the product market of their produce products but also with the capital market in order to fund their projects (Haslam et al, 2000). The expectations from the shareholders of an organization, create effects on the organization in different ways and the most important issue among them is the corporate credibly in the eyes of the shareholders. As the technology is advancing, there is a growing issue of extreme competitiveness among corporations for different reasons as the technologies and business methods can easily be copied by the competitors (Teece, 2000).  The situation led the organizations to the diminishing profit for the organization. In order to overcome the disadvantages and limitations associated with the traditional budgeting methods, the number of other budgeting techniques can be used. Some of the new budgeting methods are ABB[1], ZBB and Kaizan Budget.

3.Alternative Budgeting Techniques

4.Activity Based Budgeting

The research studies conducted in the field of budgeting show that the companies of the modern ages are not trying to move away from the traditional budgeting altogether rather they are trying to adapt the budget according to the management needs by using the new techniques of budgeting like the ABB (Pietrzak, 2014).

In order to eliminate the loopholes carried out by the traditional method of budgeting, many companies have shift to some latest and flexible methods of budgeting in order to adapt to the changes occurring in the business environment. One of such techniques is Activity based budgeting. As it is one of the unavoidable fact that the budgeting is one of the most significant management tool for the purpose of accounting so, the organizations should not stick to this very traditional method  rather they should try to adapt to the changes that are being occurred in the overall business environment. As the business environment is changing, the needs of managers are also changing alongside (Pietrzak, 2014).  

The concept of Activity-based budgeting (ABB) is a relatively new idea. Early literature in this field has emerged in the period of late 1990s. The concept of Activity Based Budgeting was first developed by a US based CAMI[2], the focus of the consortium was associated with the problems of the traditional budgeting in terms of planning. Their concentration was on the relationship between the planning related to operations and the financial results. The concept of ABB is actually the expanded form of activity based concepts in the field of budgeting (Hansen, 2011). 

Once the concept of the activity based costing developed then it led the organization desire to expand the same method to the planning and the process of budgeting (Cooper and Kaplan, 1991). The budgeting method of ABB includes the projection of costs associated with planned activities founded on the size of them that is expected. It is also based on the resources which will be consumed.  One of the main advantages of the ABB is that the costs estimated can be more accurately related to the activities. It makes the process of planning more accurate and also make the corrections more effective.

Most of the companies that using the ABB method of budgeting have report the following benefits associated with it (Pietrzak, 2014). 

• It helps in establishing the budgets that are more realistic.
• The ABB improves the level of accuracy in searching for the needed resources.
• It helps in linking the cost to the outputs in a much better way. 
• It also helps in allocating the costs related the responsibilities of the staff in a more precise way.

5.Zero Based Budgeting (ZBB)

The Zero-based method of budgeting compromises of the better approach in order to deal with the different kinds of drawbacks associated with the traditional budgeting. Unlike the traditional or the incremental budgeting, the ZBB does not start based on the level of previous year budget. The available operations are first studied and the activity or an operation must be justified according to usefulness and need for the company.   A manager who is dealing with the proposal of budget is responsible to provide such justifications. This results in starting the budget from zero for each company and the each department. For this, there is need to prepare a series of budget including one for the individual decision package that may under the considerations (Lauth, 2014).  

The decision package under considerations may include the services and their related costs. Along with that, each package includes the statement for the goals of project, the plans made in order to achieve those goals and the consequence in terms of their results if not applying the approach. 

6.The Advantages Associated with the zero-based budgeting (ZBB)

The Zero-based budgeting includes the following unique advantages over the incremental or the traditional budgeting methods (Lauth, 2014).  

• The mechanism of the planning requires the budget setters in order to inspect every item related to the budget as considering as new.
• It helps in allocating the required resources based on the requirements of the planning and the results.
• It provides the advantage over the traditional method of budgeting by not just considering the previous year figures and making the budget for the New Year setting from zero.
• It provides help to the budget setters in order  to develop the attitude that is  questioning in nature in terms of  inefficiencies through this the wastage may be reduced.
• It helps in achieving the level of efficiency by encouraging the managers by looking at the alternative plans for operations.

 

7.Implementing the zero-based budgeting

The Zero-based budgeting purposes to defend the allocation of resources allocation in an the scheme of individual budgeting without considering the budgets of year to year. The ZBB is not depending on the historical form of data and the budget for every year is set as a fresh budget from zero. The manager is responsible for allocating resources by starting it from zero. The manager responsible for this process needs to give justifications for every section of the budget. Every item of the budget will be questionable at this stage because each item is set as new for allocating the resources for the New Year. The items will be queried in terms of the cost associated with that and the outputs which will be get as a result of it (Lauth, 2014).  

8.Kaizen Based Budgeting

The Kaizen is a practice for repeatedly improved processes that is used for the purpose of cost reduction.  The concept of the Kaizen budgeting tends to be yielding the gradual enhancements over the long time period. The concept is able to be applied on the budgeting by including the expected cost discounts in the planned outputs of the business. The Kaizen approach will be used in order to decrease down the costs below the existing level on the continued basis.

The Kaizen budgeting method will call for the great dealing of the planning through the management, as they must be committing the sufficient time and the required resources for the inspection of each and every aspect of a business. This method can be an alternative the traditional or incremental methods of budgeting (Pesic-Tomic & Andrijasevic, 2014).

 

 

 

References

 

Collier, P., & Berry, A. (2002). Risk in the process of budgeting. Management Accounting Research, 13(3), 273-297.

Cooper, R., & Kaplan, R. (1991). Using ABC for budgeting and transfer pricing. The Design of Cost Management System. NJ: Prentice Hall.

Ekholm, B., and J. Wallin. (2000). Is the annual budget really dead? The European Accounting Review, 9: 519–539.

Hansen, S.C. (2011). A Theoretical Analysis of the Impact of Adopting Rolling Budgets, Activity-Based Budgeting and Beyond Budgeting. European Accounting Review,

Hope, J., and R. Fraser. (2003). Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Boston, MA: Harvard Business School Press.

Haslam, C., Neale, A. and Johal, S., (2000). Economics in a business context, Thomson learning.

Jensen, M. (2001). Corporate budgeting is broken—Let’s fix it, Harvard Business Review (November):  95–101.

Lauth, T. (2014). Zero-Base Budgeting Redux in Georgia: Efficiency or Ideology?. Public Budgeting & Finance, 34(1), 1-17. http://dx.doi.org/10.1111/pbaf.12032

Lukka, K. (1988). Budgetary biasing in organizations: Theoretical framework and empirical evidence. Accounting, Organizations and Society, 13 (3): 281–301.

Marcino, G. R. (2000). Obliterate traditional budgeting. Financial Executive (November-December): 29–31.

Neely, A., M. R. Sutcliff, and H. R. Heyns. (2001). Driving Value through Strategic Planning and Budgeting. New York, NY: Accenture.

Pietrzak, ?. (2014). Traditional versus Activity-based Budgeting in Non-manufacturing Companies. Socscie, 82(4). 

Pesic-Tomic, V., & Andrijasevic, M. (2014). Cost management in the internal value chain of integrated application of activity-based costing, Kaizen concept and target costing. Megatrend Revija, 11(4), 365-380. 

Ryan, B. (2007). Budgeting, the individual and the capital market: A case of fiscal stress. Accounting Forum, 31(4), 384-397.  

Teece, D. (2000). Managing intellectual capital. Oxford: Oxford University Press.