ZERO-BASE-BUDGETING

By: Sujeet Pandit

MeaningZero Base Budgeting is the latest technique of budgeting. A

budget is a representation of quantification of the firm’s objectives. An accurate budget can be framed, when a relationship between the inputs and outputs can be established.

In Zero Base budgeting, justification of expenditure is to be made for the past as well as new projects. In the traditional budgeting, the figures of the previous years are taken as base and additions are made for the current year. But, in Zero Base Budgeting, even the running projects are to be justified for continuation.

In The Word Of Peter A Pyher:

“ A planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (Hence Zero base) and shift the burden of proof to each manager to justify why he should spend money at all. The approach requires that all activities be analyzed in ‘decision package’ which are evaluated by systematic analysis and ranked in order of importance.”

STEPS FOR PREPARATION OF ZERO BASE BUDGETING

(A) Determining the Objectives(B) Extent of Coverage(C) Developing Decision Units(D) Developing Decision Packages(E) Preparation of Budgets

BENEFITS OF ZERO BASE BUDGETING

1. Proper Allocation of Funds2. Systematic Evaluation 3. Links Budgets with Goals of Enterprise4. Zero Base Approach5. Optimum use of Resources6. No Incremental Approach7. Most Appropriate for Non-Manufacturing Areas

LIMITATIONS OF ZERO BASE BUDGETING

Computation of cost-benefit analysis is essential for ZBB. This is not possible in respect of non-financial matters.The system of ZBB has no scope to adjust for changes. So, ZBB has no scope in flexible budgeting.ZBB involves lot of time and cost of operating is also high.Formulation of decision package is a difficult process and all the managers may not have the necessary expertise.

Traditional Vs. ZBBBasis of

Difference Traditional Approach ZBB

1. Emphasis

It is more accounting oriented than decision oriented. Depend upon past data and lays emphasis on 'how much'.

It is decision oriented. Lays emphasis on 'why'.

2. Approach Its approach is monitoring towards expenditures.

Its approach is towards achievement of objectives.

3. Focus

Its focus is on increase or decrease in expenditures over the past. Its focus is on cost benefit analysis.

4. Communication

In traditional budgeting, communication is usually vertical.

Its encourages communication both vertically and horizontally.

5. Method

The method preparation of traditional budget is based upon extrapolation.

Its preparation is based upon selection of decision package in view of cost-benefits analysis.

DIFFERENCES BETWEEN TRADITIONAL BUDGETING AND ZERO BASE BUDGETING