ZERO BASE BUDGETING

Presented by:Presented by: TANUJ-11101163TANUJ-11101163

TARUN-11101139TARUN-11101139Hj Hj FROM:-FROM:- Haryana school of businessHaryana school of business GJUS&T,HISSARGJUS&T,HISSAR

INTRODUCTION Zero base budgeting (ZBB)is an alternative to

incremental budgeting . ZBB was introduce at Texas in USA in 1969 by Peter Phyrr , who is known as the father of ZBB . This is not based on incremental approach and previous year’s figures are not taken as the base for preparing next year’s budget. Instead the budget figures are developed with zero as the base , which means that a budget will be prepared as if it is being prepared for a new company for the fist time.

Historical development of ZBB

ZBB or some modified version of it, has been used in the private- and public -sectors for decades. The first known application of zero-base budgeting was by the U.S Department of Agriculture in 1962. However, the general problem of incremental budgeting that zero-base budgeting attempts to solve has been recognized from a much earlier period.

In fact , when Jimmy Carter became the President of USA , he directed that all federal government agencies adopt ZBB.

DEFINITION

According to C.I.M.A. , London ,ZBB is defined as “A method of budgeting where by all activities are revaluated each time a budget is set .Discrete levels of each activity are valued and a combination chosen to match funds available.”

Zero Base Budgeting

Purpose of Zero-Base Budgeting

The Objective of Zero Based Budgeting is to “reset the clock” each year. The Traditional incremental budgeting assumes that there is a guaranteed budgetary base-the previous year’s level of appropriations -and the only question is how much of an increment will be given. Zero Based Budgeting implies that managers need to build a budget from the ground up, building a case for their spending as if no baseline existed- to start at zero.

The purpose of ZBB is to revaluate and reexamine all programs and expenditures for each budgeting cycle by analyzing workload and alternative levels of funding for each program or expenditure. Through this system, each program is justified .

Application 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.

Main features of ZBB

All budget items both old and newly proposed are considered totally afresh.

Amount to be spent on each budget item is to be totally justified.

Department objectives are linked to corporate goal.

The main stress in not on ‘how much’ a department will spend but on ‘why’ it need to spend.

Manager at all levels participate in ZBB process and they have corresponding accountabilities.

ADVANTAGES

In ZBB all activities included in the budget are justified on cost benefit considerations witch promote more effective allocation of resources.

ZBB discards the attitude of accepting the current position in favour of an attitude of questioning and challenging each item of budget.

Cost behaviour patterns are more closely examined.

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In the course of ZBB process inefficient and loss making operation are identified and may be removed.

It add psychological push to employees to avoid wasteful expenditure.

It is an education process and can promote a management team of talented and skillful people who tend to promptly respond to changes in the business environment.

DISADVANTAGES

ZBB leads to an enormous increase in paper work and results in high cost of preparing budget every year.

Managers may resist new ideas and changes. They may feel threatened by ZBB because all expenditures are questioned and need to be justified.

In ZBB there is danger of emphasising short-term gains at the expense of long-term benefits.

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It may not always be easy to properly rank decision packages and this may give rise to conflicts.

For introducing ZBB , managers need to be given proper training and education regarding this new concept, its pros and con and implementation.