Z B B – ZERO BASED BUDGETING

Z B B – ZERO BASED BUDGETING

Salient Features:

ü  A technique of planning and decision making which reverses the working process of traditional budgeting.

ü  In traditional budgeting (incremental budgeting), Managers justify only increases over the previous year’s budget and what has been already spent is automatically sanctioned.  No reference is made to the previous level of expenditure.

ü  By contrast, in Zero-based budgeting, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases.

ü  Requires the budget request be justified in complete detail by each Manager starting from the Zero-base.

ü  The zero base is indifferent to whether the total budget is increasing or decreasing.

ü  ZBB is especially encouraged for Government budgets because expenditures can easily run out of control if it is automatically assumed what was spent last year must be spent this year.

ADVANTAGES:

ü  Efficient allocation of resources, as it is based on needs and benefits.

ü  Drives Managers to find cost effective ways to improve operations.

ü  Detects inflated Budgets.

ü  Useful for especially Service Departments like Telecom, Railways etc, where the output is difficult to identify.

ü  Identifies and eliminates wasteful and obsolete operations.

ü  Eliminates the “spend it or lose it” mentality of traditional budgets/incremental budgets.

DISADVANTAGES:

ü  Difficult to define decision units and decision packages.

ü  Time consuming and exhaustive.

ü  Difficult to understand and communicate the budgeting because more managers are involved in the process.

ü  Forced to justify the every detail related to the expenditure.  So not suitable for R & D depts.

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