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72319102 Finance Revise EW

72319102 Finance Revise EW

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Published by Haseeb Iqbal
Zero Based Budgeting is helpful for student of finance & concerned professionals
Zero Based Budgeting is helpful for student of finance & concerned professionals

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Published by: Haseeb Iqbal on Oct 16, 2009
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10/15/2009

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ZERO-BASED BUDGETING 1
PROBLEM STATEMENT
To identify the pros and cons of the Zero-Based Budgeting, evaluating the reason behind their success or failure.
PURPOSE STATEMENT
The purpose of this research is to highlight the concept of Zero-Based Budgetingand its application on the local and governmental organizations. This paper also focuseson the strength and weaknesses of the Zero-Based Budgeting and discusses some arisingissues of Zero-Based Budgeting and its application in the business world.
SCOPE
This research paper will discuss upon the history, drawbacks, solutions, andimplementation of Zero-Based Budgeting. It will further highlight the importance of Zero-Based Budgeting in the local and government sectors and try to assess the mainreasons behind its increasing popularity in the local and government departments,discussing both positive and negative aspects attached to it.
RESEARCH METHEDOLOGY
For the purpose of this research paper, only secondary sources were used. Most of the data that has been referred to is obtained from various business journals, onlinearticles and most importantly books relevant to the course. Some data was also obtainedfrom websites directly and has been referenced in the bibliography.
INTRODUCTION
Budgeting is an essential phase of managing the activities of the organization.Budgeting is an important tool for the management not only in the manufacturing
 
ZERO-BASED BUDGETING 2
organization but also in a non-manufacturing organization. A good budgeting systemmainly focuses on planning and control. The planning phase concentrates on objectivedevelopment and preparation of budgets helps in achieving those objectives. Controlensures that the steps taken by the management are planned, and the path to attainment of the objectives is known. Control also ensures that all parts of the organization work together towards achieving those objectives.Zero-based budgeting is a planning procedure that requires the manger to startwith the assumption that the base entry of all planning items is Zero dollars. The Zero-Based Budgeting was originally formulated to be used in the government sector in a wayto justify cost requests for the succeeding year. The Zero-Based Budgeting procedureforces the planner to completely justify the budget. It assumes that the previous year’s budget is not a valid base from which to work.The primary aim of Zero-Based Budgeting is to justify budget requests for every budgeting cycle, regardless of prior period budgets.
LITERATURE REVIEW
The Zero-Based Budgeting technique was originally developed for use ingovernment organizations as a way to justify cost request for the following year. TheU.S. department of Agriculture was the first department to implement Zero-BasedBudgeting in the 1960s. Although Zero-Based Budgeting was developed by TexasInstruments in 1970s, it was initially adopted by many government organizations duringthe same period of 1970s and 1980s (Daft, 1997).
 
Zero-Based Budgeting gained fame in
 
ZERO-BASED BUDGETING 3
1977 when President Jimmy Carter introduced Zero-Based Budgeting into the federal budgeting system.The concept had earlier been introduced in an article written by Peter A. Pyhrr inthe Harvard Business Review in 1970s. But the adaptation of Zero-Based Budgeting onthe federal level spread due to the significant efforts of Jimmy Carter. Before itsimplementation on the Federal level, Jimmy Carter, the-then Governor of California,along with Peter Pyhrr, tried to implement Zero-Based Budgeting in his state in 1973.The system was to be implemented on the executive budget for the State of Georgia butdue to the greater amount of time and effort requirement the implementation was notsuccessful. However, with further modifications Zero-Based Budgeting was largelyhailed as a success when introduced to Congress in 1977.Zero-Based Budgeting is used by managers to review and analyze programs, proposals, activities, and functions to increase profitability; enhance efficiency, or lower costs. Zero-Based Budgeting is basically a microeconomic tool that the government usesto transform objectives into efficient operating plans. Zero-Based Budgeting facilitatesthe state or governmental decision makers to combine planning, budgeting andoperational decision making into a systematic process. An important element of this budgeting procedure is that it helps design the priority of government programs andactivities. When the government faces deficiency in their revenue, Zero-Based Budgeting plays its part to provide ranking programs and an activity based on overall effectivenessand provides the best available alternatives. In addition, companies such as XeroxCorporation, Westinghouse Electric Corporation, and Texas Instruments Inc. are usingZero-Based Budgeting, and its use is expected to continue to grow
 
(Mathur, 2000).

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