Roll No.38 - LLIMS - MCS _ Internal-2

8/7/2019 Roll No.38 - LLIMS - MCS _ Internal-2

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Zero Based BudgetingZero Based Budgeting

Zero based budgeting is a technique of planning

and decision making which reverses the working

process of traditional budgeting.

The term ´Zero based budgetingµ is sometimes

used in personal finance to describe the practice

of budgeting every dollar of income received,

and then adjusting some part of the budget

downward for every other part that needs to be

adjusted upward.It would be more technically correct to refer to

this practice as ´active balanced budgetingµ.



Historical development of Historical development of

ZBBZBBZBB or some modified version of it, has been used in theprivate- and public -sectors for decades. The first knownapplication of zero-base budgeting was by the U.SDepartment of Agriculture in 1962. However, the general

problem of incremental budgeting that zero-base budgetingattempts to solve has been recognized from a much earlierperiod.

Indeed, the major next application of ZBB in governmenthas been tracked back to GOV. Jimmy Carters use of it inGeorgia in the early 1970s.

In the private sector, the major leap forward occurred withthe development at Texas Instruments Inc. of a way tohandle the mass of data. This involved the implementationof a Decision Package approach to prepare the 1970budget for the Staff & Research Divisions.



Application of ZBBApplication of ZBB

The practical application of ZBB involves the use

of the Decision Package. All budgetary

procedures involve an identification of

organizational objectives. In the context of these

objectives, ZBB involves three stages:

1. Identification of decision units.

2. Development of decision package.

3. Review and ranking of decision packages.



AdvantagesAdvantages� Efficient allocation of resources, as it is based on needs and

benefits.

� Drives managers to find cost effective ways to improve

operations.

� Detects inflated budgets.

�

Municipal planning departments are exempt from this budgetingpractice.

� Increases communication and co-ordination within the

organization.

� Identifies and eliminates wasteful and obsolete operations.

� Identifies opportunities for outsourcing.

� Useful for service departments where the output is difficult to

identify.



DisadvantagesDisadvantages

y Difficult to define decision units and decision packages, as it istime-consuming and exhaustive.

y Forced to justify every detail related to expenditure. The R&D

department is threatened whereas the production department

benefits.

y In a large organization, the volume of forms may be so large thatno one person could read it all. Compressing the information

down to a usable size might remove critically important details.

y Honesty of the managers must be reliable and uniform. Any

manager that exaggerate skews the results.

y Necessary to train managers. Zero based budgeting must beclearly by managers at various levels to be successfully

implemented. Difficult to administer and communicate the

budgeting because more managers are involved in the process.

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Roll No.38 - LLIMS - MCS _ Internal-2