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Zero Base Budgeting

Zero-base budgeting requires departments to justify their entire budget requests from scratch each year, rather than basing budgets on previous years' funding plus or minus an increment. It involves departments identifying and prioritizing their activities, conducting cost-benefit analyses, and selecting decision packages to propose budgets that reflect only necessary expected costs. While it promotes optimal resource allocation and managerial accountability, zero-base budgeting is also more time-consuming and complex than incremental budgeting approaches.

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222 views11 pages

Zero Base Budgeting

Zero-base budgeting requires departments to justify their entire budget requests from scratch each year, rather than basing budgets on previous years' funding plus or minus an increment. It involves departments identifying and prioritizing their activities, conducting cost-benefit analyses, and selecting decision packages to propose budgets that reflect only necessary expected costs. While it promotes optimal resource allocation and managerial accountability, zero-base budgeting is also more time-consuming and complex than incremental budgeting approaches.

Uploaded by

Richa Sachan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PRESENTATION ON

ZERO BASE BUDGETING

JOLLY SACHAN
M.COM
3rd SEM
MANAGEMENT ACCOUNTING
About Budget
A budget can be define as a quantitative expression of the
operational plans of an organisation for a future accounting period.

The three essential of a budget:

Prepared in advance based on future plan of action.

Relates to future period and based on objective to be achieved.

Is a monetary statement that makes management think, plan & act

as a team to render better medical service at affordable costs.


ZERO BASE BUDGETING
Zero-based budgeting is a budgeting method where every

expenditure must be justified every budget cycle. When the

company begins a budget process, they start from zero.

Each department must request funds via a detailed plan

describing what each allocation of funds will be used for

and what benefits the company will receive from it.


Overview Zero Base Budgeting (ZBB)

Zero-based budgeting is a budgeting method that involves starting with $0 and adding only enough money
in the budget to cover expected costs.
How it works (Example):
There are many ways to create company budgets. Let's take the marketing department of Company XYZ as
an example. Last year, the department spent $1 million. What's the right way to set a budget for next year?
You might simply give the department $1 million again, but this might not reflect the changes in the
marketing programs next year, the need to hire more marketing people due to additional sales, or other
factors.
Another way might be to give all departments a 10% increase or decrease based on what the board of
directors would like earnings per share to be next year. This would give the department $1.1 million or
$900,000, depending on which way the board goes.
A third way would be zero-based budgeting, whereby the department starts with no budgeted funds and
must justify every person and expense that should be included in the budget for the coming year. This
might result in a budget of, say, $1,024,314, which is higher than last year but reflective of the actual
needs next year.
About of zero base budgeting
Zero base budgeting is one of the renowned managerial tool, developed in
the year 1962 in America by the Former President Jimmy Carter.

The name suggests, it is commencing from the scratch, which never


incorporates the methodology of the other type of budgeting in determining
the estimates.

The zero base budgeting considers the current year as a new year for the
preparation of the budget but the yester period is not considered for
consideration.

The future activities are forecasted through the zero base budgeting in
accordance the future activities.
Steps involve in zero base budgeting
The very first step is to prepare the zero base budgeting is to enlist the

objectives.

The extent of application should be decided in the next phase of the ZBB.

The next important stage is to prioritize the activities.

The most important step involved in the process of ABB is cost benefit

analysis.

The final step is to select, approve the decision packages and finalise the

budget.
Advantages of zero base budgeting
It acts as guide for the management to allocate the resources more

accurately depends upon the priority for an effective implementation.

It enhance capability of the managers who prepares the budget for future

action.

It paves way for optimum utilization of resources available.

It is technique of utilitarian of the resources with reference to the activity

involved.

It is dome shaped only towards the achievement of organizational goals.


Disadvantages of zero base budgeting
More time-consuming than incremental budgeting.

Justifying every line item can be problematic for


departments with intangible outputs.

Requires specific training, due to increased complexity vs.


incremental budgeting.

In a large organization, the amount of information backing


up the budgeting process may be overwhelming.
Criticism
Non financial matters cannot be
considered for the cost & benefit analysis.
Difficulties involved in the process of
ranking of decision packages.
It needs more time span for preparation

and cost of operations is more and more.


THANK YOU

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