Zero Based Budgeting

Topics: Zero-based budgeting, Budget, Budgets Pages: 12 (3812 words) Published: October 22, 2011 zero based budgeting (ZBB)
Method for preparing cash flow budgets and operating plans which every year must start from scratch with no pre-authorized funds. Unlike the traditional (incremental)budgeting in which past sales and expenditure trends are assumed to continue, ZBB requires each activity to be justified on the basis of cost-benefit analysis, assumes that no present commitment exists, and that there is no balanceto be carried forward. By forcing the activities to be ranked according to priority, ZBB provides a systematic basis forresource allocation.
Zero-Based Budgeting - ZBB

What Does Zero-Based Budgeting - ZBB Mean?
A method of budgeting in which all expenses must be justified for each new period. 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. 

ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations.  

Investopedia explains Zero-Based Budgeting - ZBB
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. Definition Explanation and Concept of Zero Based Budgeting (ZBB) Method: Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last year's budget. In traditional approach of budgeting, the managers start with last year's budget and add to it (or subtract from it) according to anticipated needs. This is an incremental approach to budgeting in which the previous year's budget is taken for granted as a baseline. This approach is called incremental budgeting. Zero based budgeting approach requires considerable documentation. In addition to all of the schedules in the usual master budget, the manager must prepare a series of decisionpackages in which all of the activities of the department are ranked according to their relative importance and the cost of each activity is identified. Higher level managers can then reviewthe decision packages and cut back in those areas that appear to be less critical or whose costs do not appear to be justified. Zero based budgeting is a good idea. The only issue is the frequency with which a ZBB reviewis carried out. Under zero based budgeting (ZBB) ,the review is performed every year. Critics of such type of budgeting charge that properly executed zero based budgeting is too time consuming and too costly to justify on an annual basis. In addition, it is argued that annual reviews soon become mathematical and that the whole purpose of zero based budgeting is then lost. Whether or not a company should use annual reviews is a matter of judgment. In some situations, annual zero based reviews may be justified; in other situations they may not because...
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