ZERO BASE BUDGETING (ZBB) - Accounts and Finance for Managers

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 types 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 with the future activities.

Peter A Pyher “A planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (Hence zero base) and shifts the burden of proof to each manger to justify why he should spend money at all. The approach requires that all activities be analysed in “decision packages” which are evaluated by systematic analysis and ranked in order of importance”

This type of budgeting requires the manager to reason out the aim of spending, but in the case of traditional budgeting is unlike, which are never emphasize the reasons of spending in terms of expenses.

Traditional Budgeting vs Zero Base Budgeting

Traditional Budgeting vs Zero Base Budgeting

Steps involved Zero Base Budgeting

  1. The very first step is to prepare the Zero Base Budgeting is to enlist the objectives.
  2. The extent of application should be decided in the next phase of the ZBB.
  3. The next important stage is to prioritize the activities.
  4. The Most important step involved in the process of ABB is cost benefit analysis.
  5. The final step is to select, approve the decision packages and finalise the budget.

Benefits of Zero Base Budgeting

  1. It acts as guide for the management to allocate the resources more accurately depends upon the priority for an effective implementation.
  2. It enhances capability of the managers who prepares the budget for future action.
  3. It paves way for optimum utilization of resources available.
  4. It is a technique of utilitarian of the resources with reference to the activity involved
  5. It is dome shaped only towards the achievement of organizational goals.

Criticism

  1. Non financial matters cannot be considered for the cost & benefit analysis
  2. Difficulties involved in the process of ranking of the decision packages
  3. It needs more time span for preparation and cost of operations is more and more

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