Traditionally, on the basis of the
targets which have been set in the last year, budgeting is done. In the last year’s
budget, certain additions & deductions are done for arriving at the figures for
the current budget. Thus, in making traditional budget, we have to depend on the last
year’s targets as well as on the principles of incrementalism or decrementalism,
for the purpose of deciding upon the additions or deletions which are required to be
incorporated in the budget figures of the previous year so that the figures of the
current budget can be arrived.
In case of Zero-base budgeting (ZBB), the assumption is made that there was no budget for the previous year & in the light of expected benefits & costs which are involved; independent evaluation are made of the proposals of the current budget. Thus, ZBB refers to the formulation of a budget without any reference made to the previous plans & achievement but particular reference is made to the justification of the proposed resources’ allocation. This is not done only once. Whenever a budget needs to be prepared, every time, the process of budgeting should start from zero & in terms of cost-benefit analysis, the proposed allocation of resources should be justified.
In the cases of planning & decision making, ZBB becomes ideal. Undertaking of previous type of work of which there is no previous experience is included in development planning. In these cases, on the basis of past targets which have been modified by certain additions & deletions, budgets can be prepared. On the basis of cost-benefit analysis, evaluation of every budget proposal is to be done. Identification of all proposed activities is to be done, as evaluation of decision packages is made by systematic analysis & ranking is done in order of priority. Upon the priority list, depends the decision making.
Main Features of ZBB:
The main features of ZBB are the following:
- As the basis of budgeting, Zero (or scratch) is taken & not the previous budgets’ targets.
- The fund demanded has to be justified by the management of each decision unit.
- Grouping of all proposed activities has to be done into various decision packages.
- According to priority, the adequate evaluation & arrangement of all decision
packages are done.
- After proper evaluation, consideration has to be given to the alternative decision
- On the merits of evaluation of all decision packages including the alternative decision packages, resources are finally allocated.
Difference between ZBB & Traditional Budgeting:
The distinction between the traditional budgeting & zero-base budgeting are the following:
- In traditional budgeting, emphasis is given on previous level of expenditure, whereas,
in ZBB, every time a budget is prepared, new economic appraisal is made.
- Traditional budgeting is a function which is accounting oriented, whereas, ZBB
is a function which is project or decision oriented.
- For the preparation of a traditional project, rejustification of the existing programme
is not needed, whereas, for the preparation of a zero-base budgeting, the justification
of existing & new projects is needed to be done in the light of benefits & costs.
- In the case of traditional budget, the justification regarding why, for a particular
decision unit, a particular amount of expenditure is decided upon, is justified
by the top management, whereas, in case of ZBB, the amount of expenditure is justified
by the manager of the decision unit & not the top management.
- In the case of traditional budgeting, the amount to added with or deleted from
the figures of the previous budget figures is only taken into account, whereas,
in case of ZBB, existing level of expenditure is appraised & the justification
of future proposal for expenditure is done from different angles.
- Preparation of a traditional budget is a simple job which is done year after year monotonously, whereas, preparation of a zero-base budgeting requires logical approach & many complex steps are involved for the establishment of logic behind a proposal.
Applicability of ZBB:
In planning & development areas particularly of the government & local bodies, ZBB is very suitably applicable. With reference to costs & benefits, thorough examination of the projects of every ministry is done. In respect of allocation of resources, upon the report of cost-benefit examination which is prepared by persons competent to do so, depends, which project of which ministry shall enjoy priority. ZBB becomes ideal in cases where the resources are limited but there are many development works which is needed to be done as in case of educational institutions, local bodies etc., because there is almost guarantee of the efficient use of limited resource.
In manufacturing concerns, for the purpose of controlling cost there are many devices like standard cost technique, work & motion study etc. The prime costs & production overhead gets controlled by these techniques because in these cases direct relationship between cost & output is there. But in manufacturing concerns production function gets supported by various other expenditures, but in these cases, relationship cannot be established between cost & output. For the application of ZBB, this area of expenditure is a suitable field. Expenditure like accounting, maintenance, electricity, rent of administrative office, postage, advertisement, research, development & many others covers this area.
Merits of ZBB:
The following are the merits of ZBB:
- Careful examination of all projects-whether current or future is done with reference
to cost & benefits & the project which is most efficient is accepted. Thus,
ZBB is always a technique which is based on logic. The current projects, only if
they are logically sound & efficient, are continued.
- For rational planning, on the cost-benefit acceptability, the most efficient ones
amongst the available alternatives are chosen. The managers of decision units are
required by ZBB to find out cost effective ways for the implementation of the plans.
Thus, with the help of ZBB, best planning is made & cost can also be controlled
with the help of ZBB.
- In respect of both existing & future projects, cost-benefit analysis is done.
Ranking of the projects is done on the basis of the result of the analysis & allocation
of funds is done in order of priority. Thus, ZBB helps in getting labour efficiently
- In ZBB, for the purpose of using the available resources of the organization, the
most useful alternatives are found out. Alternative ways are taken into consideration
in performing an activity also. Similarly, consideration is also given to the alternative
quantum of efforts which are to be put in. These help promoting new ideas so that
an activity can be performed in the best possible way.
- With regard to justifiability of continuing new undertaking on the basis of cost-benefit
analysis, existing activities & new projects are appraised with equal importance.
- In ZBB, reports are to be submitted by managers of all decision units on their
claims of funds & justification of the claims. Thus, in the making of zero-base
budget, it becomes compulsory for all managers of decision units to participate.
Thus in allocation & utilization of funds, forthcoming of new ideas gets promoted
- Since in ZBB, existing activities gets appraised carefully, activities which fails
to give desired results may be discontinued & thus by this way unproductive
expenditure may be saved.
- Since all managers adopt ZBB technique, they are obliged for making self evaluation
of projects under their command. If there are any loopholes in the working progress,
those are automatically detected & remedial measures are adopted. Efficiency
in performance can be achieved by awareness of managers’ in respect of detection
of errors & their rectification.
- Automatic motivation is created by ZBB which helps forming a management team of
individuals having skills & talents.
- Top management gets linked with medium & lower level management with the help
of ZBB. Thus, speedy communication helping expediting appropriate decision-making
- ZBB helps in introducing & implementing ‘Management by objective’ (or MOB). The objectives of the traditional budgeting can be fulfilled using ZBB; as other objectives can as well be fulfilled with its help.
Demerits of ZBB:
The following are the demerits of ZBB:
- Time, energy & money is required in collecting & analyzing data of alternative
future projects as well as existing activities.
- If full co-operation amongst management staff is not forthcoming, then ZBB technique
implementation becomes difficult.
- As ideal standard of evaluation is not available, evaluation often becomes very
difficult. Technical knowledge may be required in a desired manager’s evaluation
which may not be available.
- Managers are required to undergo continuous training. Implementation of ZBB cannot
be expected in a right way if basis idea & objective of ZBB are not crystal
clear to managers.
- In case of ZBB, according to priority, ranking of projects need to be done. Irrational
ranking of project may arise due to ego of top management (i.e. Irrespective of
its merits, a project favored by the top management may be ranked high). Moreover,
regarding the method of ranking which needs to be adopted, confusion may arise
among the management staff.
- Involvement of good number of individuals may be required by ZBB. Thus, complications may be created in communication system which results in difficulty in managing of the huge volume of data & voluminous paper work may be involved etc.
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