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WELCOME

ZERO BASE BUDGETING

Presented by: Lekshmi.S2nd sem M.com Roll.No: 13

Hj

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Contents Introduction Definition Historical development Principles Features of ZBB Application of ZBB & Steps Involved Advantages Disadvantages Traditional Vs. ZBB Conclusion

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INTRODUCTIONZero 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. 05/03/2023 4

DEFINITIONAccording 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.”

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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.

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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.

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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 .

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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.

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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.

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Steps involved in zero base budgeting1. Identification of decision units2. Development of Decision packages3. Review and ranking of decision making

IDENTIFICATION OF DECISION UNITS

A specific manager should be clearly responsible for the operation of the program.

It must have well defined & measurable impacts. It must have well defined & measurable objectives. Identify and describe a particular activity. After the identification of appropriate decision units,

the next step is to prepare for each of these a document describes the objectives or purposes of the decision unit and the actions that could be taken to achieve them. Such document is called “Decision Package”.

Development of Decision packages1. Mutually exclusive – Contains alternative ways of doing a

job.2. Incremental – Defining different levels of efforts

Decision packages will have work packages Costs, returns, purpose, expected results, Alternatives available, Consequences if activity is not performed or reduced.

Example - Opening a HospitalStaff(Doctors, Nurses…)Equipments and increased staffEmergency beds and less normal beds Increasing beds and other facilities

Deciding to accept or reject or amend the activity. Once the decision packages have been prepared, they are

ranked on an ordinal scale i.e 1st, 2nd, 3rd, etc in order of priority using Cost benefit Analysis.

Take a Decision Package:1. Is the activity under our control.2. Recognizing less effective activities.3. Validate – Arrangements(Elimination)4. Make the activity profitable

Decision Making - Review and Ranking of decision Package

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.

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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.

DISADVANTAGES

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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.

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TRADITIONAL BUDGETING VS ZERO BASE BUDGETING

Basic difference

Traditional Budgeting Zero Base Budgeting

Emphasis It is accounting oriented;emphasis on “How Much”

It is more decision oriented; emphasis on “Why”

Approach It is monitoring towards the expenditures

It is towards the achievement of objectives

Focus To study the changes in the expenditures

To study the cost benefit analysis

Communication It operates only Vertical communication

It operates in both directions horizontally and vertically

Method It is based on the extrapolation i.e. from the yester figures future projections are carried out

Its decision package is totallybased on the cost benefit analysis.

CONCLUSION Allow managers to quickly respond to

changes in external environment. It promotes questioning and

challenging attitudes. It ensures efficient use of limited

resources by allocating them according to the relative importance of the programs.

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Reference Accounting for Management – Dr. Jawahar Lal Accounting For Management – S.N Maheswari Introduction To Management Accounting - Hongreen

C.T

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At a Glance

IntroductionDefinition Historical development PrinciplesApplication of ZBB & Steps InvolvedFeatures of ZBBAdvantagesDisadvantagesTraditional Vs. ZBBConclusion

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THANK YOU