Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. Because of its detail-oriented nature, zero-based budgeting may be a rolling process done over several years, with only a few functional areas reviewed at a time by managers or group leadership. Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period's budget. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting. The practice also favors areas that achieve direct revenues or production; their contributions are more easily justified than in departments such as client service and research and development. The name zero base budgeting derives from the idea that such budgets are developed from a zero base: that is, at the beginning of the budget development process, all budget headings have a value of ZERO. This is in sharp contrast to the incremental budgeting system in which in general a new budget tends to start with a balance at least equal to last year's total balance, or an estimate of it. What zero base budgeting tries to achieve is an optimal allocation of resources that incremental and other budgeting systems probably cannot achieve. ZBB starts by asking managers to identify and justify their area(s) of work in terms of decision packages (qv). Zero-based budgeting is an approach to planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only variances versus past years, based on the assumption that the "baseline" is automatically approved. By contrast, in zero-based budgeting, every line item of the budget must be approved, rather than only changes. During the review process, no reference is made to the previous level of expenditure. Zero-based budgeting requires the budget request be re-evaluated thoroughly, starting from the zero-base. This process is independent on whether the total budget or specific line items are increasing or decreasing. Advantages 1.Efficient allocation of resources, as it is based on needs and benefits rather than history. 2.Drives managers to find cost effective ways to improve operations. 3.Detects inflated budgets.
4.Increases staff motivation by providing greater initiative and responsibility in decision-making. 5.Increases communication and coordination within the organization. 6.Identifies and eliminates wasteful and obsolete operations. 7.Identifies opportunities for outsourcing.
8.Forces cost centers to identify their mission and their relationship to overall goals. 9.It helps in identifying areas of wasteful expenditure and, if desired, it can also be used for suggesting alternative courses of action. One drawback to zero-based budgeting is cost in terms of managerial time; it takes a considerable amount of time to go through the process of reviewing operations in enough detail to justify costs each budget cycle without relying on past expenditures. One solution to this problem is to create a rolling budget every year and perform a zero-based budget every three to five years, or when a major change occurs within the operation. This allows an organization to benefit from the advantages of zero-based budgeting without an excessive amount of work. Likewise, traditional rolling budgets should never strictly rely on a prior-year budget plus a percentage; consideration should always be given to past numbers. In some cases, a zero-based budget may rely on some prior numbers where it is overwhelming to create a budget from scratch. Ultimately, the process gives top management the opportunity to judge the performance of managers in terms of allocating resources efficiently and effectively, and gives managers more...
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