Question

Explain fixed and variable inputs and how they should be managed Compare and contrast zero based budgeting and modified zero based budgeting. Highlight the major differences. Differentiate between debt and equity financing

Answer 1

Fixed inputs are those inputs which is constant for a short period. These cannot be changed in a short run.It will be fixed for a period of time.Capital can be the most relevant example for fixed inputs. The capital investment decisions are irreversible for particular period of time.

Variable inputs are those inputs which will vary according to production.They are not constant.Variable inputs are applied in the short run production function.Labour is the example of variable input. In a firm the number of employees appointed only on the basis of production. If there is no production then no labour is required.

Fixed and variable inputs are applied on the basis of production.Even if there is no production ,the fixed variable will be there.

variable inputs can be applied only if there is production.It always vary according to production.

ZERO BASED BUDGETS AND MODIFIED ZERO BASED BUDGETS.

Zero based budgeting is a recent trend in budgeting. All other budgets are prepared on the basis of previous years budgets, but under zero based budgets,it starts from zero. Here every year is taken as a new year and past datas are not considered for preparing budgets.Zero is taken as base.

Modified zero based budgets are the products comes from zero based budgets.

Both these budgets are not using any past data for preparing budgets. They starts with zero itself

Both are cost benefit as well as forward looking approach

Difference between ZBB and MZBB

MZBB can produce more cost efficient budget than ZBB

MZBB needs less efforts for preparing budgets than ZBB

Firms have necessary fixed operating expenses that do not need to be addressed by the ZBB process

DIFFERENCE BETWEEN DEBT AND EQUITY FINANCE

Debt financing simply refers to loan debentures bond financing etc

Equity financing means financing through shares issues.

Debt financing includes borrowing funds from lenders for a fixed period of time,after that is has to be repaid.Till that period the lendee has to pay a fixed sum of money as interest.

Equity financing is through issuing shares like in the form of equity shares or preference shares. The share holders get return as dividend not interest

Debt holders are not the owners of the business. They are not having any right in the organisation.

Equity share holders are the owners of the organisation.

Debt financing is a tax free financing

Equity financing are not tax free.