Modern Budgeting A TBC or ABC approach

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As we already know, the rapid development of transportation and telecommunication sectors make the competition in business world getting tighter. Companies had to have added-value in order to compete in global markets, which are flexibility, cost and quality factors (Houma; -, Porter: 1980). Thus, the most important factor is the cost, because consumer will choose high-quality product with cheapest price. Cost leadership will be attained by companies which successfully eliminated the non added-value activities for customer; by making budgeting that believed to have important role in planning and controlling company activities to create efficiency.

The role of budgeting in companies and also modern developments that replaced traditional budgeting will be discussed further in this essay. In the end of this essay, would be provide recommendations as for which method is better to be implemented by the company in facing today's competition.

Budget according to Sullivan (2003) is the company's plan of saving and spending while according to Bhimani (2008) is a set of action plan that represent in quantitative expression and proposed by the manager for the future period. So, it can be concluded that budgeting is planning or forecasting activities that systematically arranged in monetary basis, about all the company's economic activities in the purpose to achieve company's objective and applied for respective time in the future.

Since budget is set of plans that represent the management's expectation or can be told as company's objective during a year, hence budget generally functioned as management control on top of company's operational activities. This is because the management could value the company performance by comparing actual result with arranged budget (Bhimani, 2008; Schiff and Lewin, 2001). By evaluating the actual result and previous budget, the management can observe non added-value activities in current practice to be eliminated in future practice; thus effectively enhance the company's performance.

Besides that, budgeting have role to increase staff's motivation especially if supported with incentives factor; because budget can be used as achievement benchmarks. In example, if actual cost is lower than the budget, so the respective manager's performance can be measured as good performance and that manager deserves reward. That is why, with the presence of budget will make the staffs maximize their efforts to achieve the targets. In the other hand, the difficulty level of budget achievement have to be reviewed (Bhimani, 2008), if the difficulty level is low, staff will feel not challenged and the result will not be optimum whilst If the budget is too tight and regarded as impossible to achieve then the motivation will be lost. So, budget has to tight but still reachable (J.Welch and S.Welch, 2007). This argument is shown in the below Figure:

Moreover, budgeting process also can increase the coordination and communication within the company (Bhimani, 2008); because the coordination and communication in several departments is needed to result a good optimum and appropriate budgeted target.

Traditional Budgeting

Traditional budgeting which already been used from many companies after more than 70 years (Clarke, 2001) is a system to set budget which using previous year's budgeting information or data then renewed by adding more variables in the making process. Traditional budget also made by centralized [1] system or top bottom system (Nolan, 2005) with the purpose to fasten the decision-making process. Thus in the other hand, this matter created employee's sense of belonging to the plan become reduced because they are not involved in the creation process and oftenly made plan become ineffective because the backline who created it not the frontline employee (Tarantino, 2007).

Since traditional budgeting made based on previous data and allocated at the beginning of the year, it tend to make innovation of the employee also become held back and make them afraid to take risk which might can bring profit to the company. It can also cause budget maximizer behavior; when the staff will dissipate more budget so the next year budgeting plan will not become smaller from current year, as also supported by Marcino (2000).

Furthermore, Mikardo (2006) said that inline with the rapid development and fast change of environment made the traditional budgeting is less appropriate to be implemented because it is not comprehend the contingency (Wallander, 1999), binding and this thing also cause the staff focus became short-term oriented and ignoring the long-term.

Eventhough there are many arguments that said that traditional budgeting ought to be stopped (Nolan, 1999; Marcino, 2000; Oldman&Mills, 1999); but based on surveys [2] done by Karen Shastri and David Stout (2008) stated that the majority of management from profit-company feel satisfied from results of traditional budgeting especially its role as operational contol, as illustrated by below table:

Managers also believed that the traditional budgeting give not much bad influence to staff's behaviour, but in reverse it can bring good influences (Shastri and Stour, 2008); as shown in these below figures:


Modern Budgeting

Since there are many contradictions related to traditional budgeting, and 61 percent of firms trying to find a solution by upgrading the system (Ekholm and Wallin, 2000), pushed a modern development in budgeting begins like starting the use of Zero Based Budgeting [3] , Activity-Based Budgeting, Beyond Budgeting and Key Performance Indicator.

By using the Zero Based Budgeting (ZBB), management can overcome the problem of incrementalism since the budgeting method is not based on the previous budget as traditional budgeting, but based on current conditions that considered as important by the management and this way of course can enhance creativity of the manager (Phyrr, 1973). On the other hand, this system also has a weaknesses such as time consuming since it must involve several managers that closets to the activity, requires a great deal and detail of data, and needs a deep analysis capabilities which not necessarily shared by all managers. Besides that, ZBB is not able to work effectively in manufacturing companies, and only good implemented in service companies (Michael and Brian, 1995).

While Activity-Based Budgeting (ABB) is different from the traditional budgeting that tends to highlight only to the financial problems. ABB is more to see from the side of business activities, where value-added costs will be maintained and the non-value added will be deleted, so make the company run more effectively, and due to the control systems and planning become more detail since it is based on the activity (Hansen et al, 2003), hence there are more overhead that can be traced which different from the traditional budgeting that calculated overhead cost only from the amount of time and direct labor costs.

The other way to solve traditional budgeting associated centralized and innovation can be minimized by using Beyond Budgeting (BB), where an employee or a unit given authority to make a decision (Clarke, 2001). Moreover, according to Tarantino (2007) the best way to measure performance is by setting key Performance Indicator (KPI) especally for company that running in service sector. Since the successness of the corporate is not only seen from operation performance but also from the other factors such as service, quality and satisfaction of stakeholders that will affect the long-term profitability of the company (Clarke, 2001)


Every budgeting system would have advantages and disadvantages, so not all managers leaving the traditional budgeting that considered have many weaknesses, to the modern budgeting. Traditional budgeting is still believed to hold a very important role in the operating cost control that could result in cost leadership (Clarke, 2001). Since traditional budgeting tends to prioritize the operating and financial performance often cause mismatches with the strategic decision (Merchant, 1985; Clarke, 2004) and less flexible in facing the rapid environmental change, it cause management to equip it with modern budgeting.

Actually, traditional budgeting is still suitable to be implemented by small firms that does not have to much diversifications in the business activity, and also for the manufacturing company or profit-company where cost efficiency hold an important role to make competitive advantage for the enterprise such as also supported by survey that done by Shastri and Stout in 2007. However, it would be better if traditional is equipped with rolling budgeting [4] that can make the budget become more flexible and update on outside changes continously. On the other hand, modern budgeting fits to be implemented by non-profit company that the advances of the company not only depend on cost but also by public image.