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Accounting Assignment Help With Zero Based Budgeting

3.7 Zero Based Budgeting (ZBB)

The technique of zero based budgeting suggests that an organisation should not only make decisions about the proposed new programmes but it should also, from time to time, review the appropriateness of the existing programmes. Such review should particularly done of such responsibility centres where there is relatively high proportion of discretionary costs.

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Zero based budgeting, as the term suggests, examines a programme or function or responsibility from “ scratch.” The reviewer proceeds on the assumption that nothing is to be allowed. The manger proposing the activity has, therefore, to prove that the activity is essential and the various amounts asked for are reasonable taking into account the volume of activity. Nothing is allowed simply because it was being done or allowed in the past. Thus, it means writing on a clean slate.

Peter A. Pyhrr defined the zero based budgeting as “an operating planning and budgeting process which requires each manager to justify his entire budget requests in detail from scratch (hence zero basis). Each manager states why he should spend any money at all. This approach requires that all activities be identified as decision packages which would be evaluated by systematic analysis ranked in order of importance.”

Thus, a cost-benefit analysis is done in respect of every function or process. It has to be justified while framing budgets. The assumption underlying zero base budgeting is that the budget for the previous period was zero, therefore whatever costs are likely to be incurred or spending programmes are chalked out, justification or the full amount is to be given. Under conventional system of budgeting, however, the justification is to be submitted by the manager only in respect of the increase in the demand for allotment of funds in excess over the budget for the previous period. Thus, instead of functionally-oriented spending approach, programme-oriented and decision-oriented approach is followed under zero based budgeting.

Advantages of ZBB

1) This system is decision oriented.

2) The technique is relatively elastic, because budgets are prepared every year as zero base.

3) It reduces wastage, eliminates inefficiency and reduces the overall cost of production because every budget proposal is on the basis of cost-benefit ratio after careful evaluation of different alternatives and the one which is ‘best’ is approved.

4) It provides for a greater possibility of goal congruence.

5) It takes into consideration inflationary trends, competitor games and consumer behaviour.

6) It vastly improves financial planning and management information system in view of its revolutionary approach.

Disadvantages of ZBB

1) It is possible to quantify and evaluate budget proposals involving financial matters but computation of cost-benefit analysis is not possible in respect of non-financial matte$

2) The cost of administration of zero based budgeting is high.

3) It may be difficult to search out various alternatives for the same activity.

4) Some decision packages are inter-related which may be difficult to rank.

5) Ranking the decision is a scientific technique. Every manager cannot be expected to have the necessary technical expertise in this matter.

6) Zero based budgeting dismisses that the past is irrelevant and thereby challenges the fundamental theory of continuity. Budgeting is a continuous process of estimating and forecasting about the future and is based on past happenings.

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