The Three Legged Stool
The Three Legged Stool budgeting analogy as explained by Zimmerman is an organizational architecture consisting of three pillars. A system to measure performance, A system to reward and punish performance, and a system that assigns decision rights.
The Ratchet Effect
The ratchet effect refers to processes or costs that incur a reduction in ability to be reversed or abated once a specific event or cost has been incurred. Just like a ratchet holds a spring in place as one winds the clock, the event or cost incurred will now be held in place.
A line-item budget is a budget in which individual items are grouped together according to their department or cost centers. This provides a means by which to compare financial data and estimate future figures.
Zero-based budgeting is a planning technique that in essence reverses the traditional budgeting method. Traditional previous years are considered baselines for costs and managers only justify current variances from the baseline. In zero-based budgeting, the baseline is understood to be a value of zero and so all variances must be accounted for and explained by the managers. This method allows for all functions within a given organization or entity to be counted for, evaluated, and mitigated on a constant basis.
A lapsing budget is one in which any unspent funds must be returned to the issuing entity. This means that a department has to with spend the money allotted to them or return it at the end of the budgeting period.
I once worked on a company budget in which many costs were not taken into account. This particular example draws on the ratchet effect principle in that our budget was impeded by irreversible costs. A pipe had broken and the costs associated with the damage were subject to possible mitigation. This caused us to overspend within the quarter.
- “Forward Roll: How Companies Can Move beyond Traditional Budgeting.” Journal of
Accountancy. 2013. Web. 23 Jan. 2016.
- Zimmerman, Jerold L., (2014). Accounting for Decision Making and Control. (8th ed.). Irwin,
CA: McGraw Hill ISBN 13:9781038464404 ISBN 10: 1308464401