Zero Based Budgeting Meaning and Definition: Zero based budgeting in management accounting involves preparing the budget from the scratch with a zero-base. It involves re-evaluating every line item of cash flow statement and justifying all the expenditure that is to be incurred by the department > Advantages of zero based budgeting **Accuracy:** Against the regular methods of budgeting that involve just making some arbitrary changes to the previous year’s budget, zero based budgeting makes every department relook each and every item of the cash flow and compute their operation costs. This to some extent helps in cost reduction as it gives clear picture of costs against the desired performance. **Efficiency:** This helps in efficient allocation of resources (department-wise) as it does not look at the historical numbers but looks at the actual numbers **Reduction in redundant activities:** It leads to identification of opportunities and more cost-effective ways of doing things by removing all the unproductive or redundant activities. **Budget inflation:** Since every line item is to be justified, zero based budget overcomes the weakness of incremental budgeting of budget inflation. **Co-ordination and Communication:** It also improves co-ordination and communication within the department and motivates employees by involving them in decision-making.
**ADVANTAGES OF ZERO BASED BUDGETING** (ZBB) Hi, Zero based budgeting process identifies inefficient operation and considers every time alternate ways of performing the same task. ZBB is used in indentification of wastage and obsolescent items of expenditure. ZBB is very much useful for the staff and support areas of an organisation such as research and development,quality control,pollution control,legal and technical staff etc. The core resources will be allocated more efficiently according to the priority of programme. ZBB provides an opportunity to the management to allocate resources for various activities only after having a thorough cost-benefit analysis. Departmental budgets are closely linked with corporate objectives ZBB ensures that the various functions undertaken by the organisation are critical for the achievement of its objectives and are being performed in the best way. Thanks
Hii Uma > Advantages of Zero based budgeting Zero Based Budgeting The Objective of Zero Based Budgeting is to “reset the clock” each year. Zero Based Budgeting implies that managers need to build a budget from the ground up, starting at zero. ZBB is to reevaluate and reexamine all programs and expenditures for each budgeting cycle by analyzing workload and efficiency measures to determine priorities or alternative levels of funding for each program or expenditure. Advantages of zero based budgeting --- 1. Out of date inefficient operations are identified. --- 2. Allow managers to quickly respond to changes in external environment. --- 3. It Promotes questioning and challenging attitudes. --- 4. It ensures efficient use of limited resources by allocating them according to the relative importance of the programs. --- 5. The annual review of the programs indicates the relative worth of the programs and thus ensures no programs continues beyond its productive life. --- 6. It helps the management to design and develop cost-effective techniques for improving operations. --- 7. The corporate objectives can be achieved more successfully under zero-base budgeting. --- 8. The establishment of decision units makes the performance evaluation system more effective. Thanks
Hiiii friend..... **The major advantages of zero-based budgeting** are flexible budgets, focused operations, lower costs and more disciplined execution, while the disadvantages are resource intensiveness, the possibility of being manipulated by savvy managers and a bias towards short-term planning. Pete Pyhrr developed zero-based budgeting in the 1970s while he was an account manager at Texas Instruments. In recent years, Fortune 500 and private equity companies have also adopted zero-based budgeting. - Zero-based budgeting deviates from traditional budgeting in that each year's budget is created from scratch. In contrast, traditional budgeting takes the previous year's budget as a template and then builds off it. Zero-based budgeting forces managers to think about how every dollar is spent, every year. This process also forces them to justify all operating expenses and consider which areas of the company are generating revenues. - In traditional budgeting, legacy costs may not be examined for years until there is some sort of economic shock that forces the company to take extreme actions. Expenses have a tendency to grow over time, with each department protecting its budget from cuts. This approach can be myopic; over time, it leads to significant misallocation of resources. - One of the major shortcomings of zero-based budgeting is that it can reward short-term thinking by shifting resources towards areas of the company that will generate revenues over the next calendar year. Some areas of the company are long-term investments, such as research and development or worker training. These won't be generating revenue in the near term, but over the long term, they are the keys to remaining competitive. - Zero-based budgeting is also quite resource-intensive. It takes a lot more time and effort to draw up a budget from scratch rather than modify an existing budget. Many critics argue that the benefits of zero-based budgeting do not justify its time cost. Further, the process can be gamed by savvy managers to get more resources into their departments. It can lead to a change in culture where there is a decreased spirit of cooperation in the company, as workers feel expendable. Regards,
Hi Uma There are a number of advantages to zero-base budgeting, which include: --Alternatives analysis. Zero-base budgeting requires that managers identify alternative ways to perform each activity (such as keeping it in-house or outsourcing it), as well as the effects of different levels of spending. By forcing the development of these alternatives, the process makes managers consider other ways to run the business. --Budget inflation. Since managers must tie expenditures to activities, it becomes less likely that they can artificially inflate their budgets – the change is too easy to spot. --Communication. The zero-base budget should spark a significant debate among the management team about the corporate mission and how it is to be achieved. --Eliminate non-key activities. A zero-base budget review forces managers to decide which activities are most critical to the company. By doing so, they can target non-key activities for elimination or outsourcing. --Mission focus. Since the zero-base budgeting concept requires managers to link expenditures to activities, they are forced to define the various missions of their departments – which might otherwise be poorly defined. --Redundancy identification. The review may reveal that the same activities are being conducted by multiple departments, leading to the elimination of the activity outside of the area where management wants it to be centered. --Required review. Using zero-base budgeting on a regular basis makes it more likely that all aspects of a company will be examined periodically. --Resource allocation. If the process is conducted with the overall corporate mission and objectives in mind, an organization should end up with strong targeting of funds in those areas where they are most needed.