ZERO BASE BUDGETING Presented by: TANUJ-11101163 TARUN-11101139 Hj FROM:- Haryana school of business GJUS&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, hasbeen used in the private- and public -sectorsfor decades. The first known application ofzero-base budgeting was by the U.SDepartment of Agriculture in 1962. However,the general problem of incremental budgetingthat zero-base budgeting attempts to solvehas been recognized from a much earlierperiod. In fact , when Jimmy Carter became thePresident of USA , he directed that all federalgovernment 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 BudgetingPurpose 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 andreexamine all programs and expendituresfor each budgeting cycle by analyzingworkload and alternative levels offunding for each program or expenditure.Through this system, each program isjustified .
Application of ZBBThe practical application of ZBB involves the use ofthe “Decision Package”. All budgetary proceduresinvolve an identification of organizational objectives.In the context of these objectives, ZBB involvesthree 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.
ADVANTAGESIn ZBB all activities included in the budgetare justified on cost benefit considerationswitch promote more effective allocation ofresources.ZBB discards the attitude of accepting thecurrent position in favour of an attitude ofquestioning and challenging each item ofbudget.Cost behaviour patterns are more closelyexamined.
. 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.
DISADVANTAGESZBB leads to an enormous increase inpaper work and results in high cost ofpreparing budget every year.Managers may resist new ideas andchanges. They may feel threatened byZBB because all expenditures arequestioned and need to be justified.In ZBB there is danger of emphasisingshort-term gains at the expense of long-term benefits.
. 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.