Zero Based Budgeting (ZBB):
Learning Objective of the article:
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 decision packages 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 review the 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 review is 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 of the time and cost involved. However, most managers would at least agree that on occasion zero based reviews can be very helpful.
Advantages | benefits of zero based budgeting process:
Disadvantages | Limitations of zero based budgeting method.
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- Inventory Purchases Budget for a Merchandising Firm
- Zero Based Budgeting
- Human Factors in Budgeting
- Profit Planning
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- Ending Finished Goods Inventory Budget
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