roll no.38 - llims - mcs _ internal-2
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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.
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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.
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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.
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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.
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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.