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8/8/2019 Zero Based Budgeting (1)
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³ A B UD GE T I S J US T A M ET HO D O F W OR R Y I NG B E FOR E Y O U S PE ND MONE Y ,
AS WELL AS A FTERWA RD.´
- A N O N Y M O U S
ZERO BASED BUDGETING
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Historical Background
y Introduced by Peter A. Pyher in the y ear 1970 in
Texas Instrument, USA , defines ZBB as, ³Budgeting all the activities of the organization from scratch or zero, disregarding trends or historical levels of expenditure.´
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Concept
y A financial management technique for planning and controlling expenditures.
y Image of the w ord µZERO¶.
y Identif y ing the effected areas of econom y.
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Definition
y ³A n operating, planning and budgeting process, which requires each manager to justif y his entire
budget requisition detail from scratch(hence zero base). Each manager states why he should spend an y
mone y at all. This approach requires that all activities be identified as decision packages, which
w ill be evaluated by s y stematic anal y sis and ranked in order of importance.´
-By Peter A. Pyher
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THE ZBB PROCESS
Identification of Decision Units
A nal y sis of Decision Units
Formulation of Decision Packages
A llocation of Organizational R esources
Preparation of Detailed Budget
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Process Details
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A dvantages
y Operational Efficienc y.
y Helps in finding out-of -date and inefficient operations.
y A pt for staff and support areas.
y Focus on A nal y sis and Decision Making.
y Optimum A llocation of Scarce R esources.
y
Ps y chological Impact.y Increase in involvement of lo w er and middle level personnel in the budgetar y s y stem.
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Disadvantages
Functional Orientation A ttitude of ZBB.
Formulation and R anking of Decision Packages.
Time and Cost.
Sometimes emplo y ees are not co-operative.
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Zero Based BudgetingZero Based Budgeting Traditional BudgetingTraditional Budgeting
y Each expenditure to be
justified.y No present commitment.
y No balance to be carried for w ard.
y A ctivities ranked according to priorit y.
y Sanction based on
previous y ear¶s expenditure.
y Justif y increase over last y ear.
y Previous y ear¶s balances are carried for w ard.
y Past sales and expenditure trends are
assumed to be continued.
Comparison
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Essentials Of ZBB
y Communication should be clear.
y Tailor-made ZBB.
y A reas where ZBB is to be applied should be clear.
y Manuals should be prepared.
y Training Programs must be organized.
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Conclusion
In the end w e can sa y that, Zero Based Budgeting(ZBB) is the management tool which bridges the gap bet w een planning and results.
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