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1. Introduction:
Zero-Base Budgeting is a new technique of planning and decision-making. It reverses the
working process of traditional budgeting. For this Zero base Budgeting assignment I have to
read an article which is taken from
Zero Based Budgeting in the Planning Process
Author(s): James C. Wetherbe and John R. Montanari
Source: Strategic Management Journal, Vol. 2, No. 1 (Jan. - Mar., 1981), pp. 1-14
Published by: Wiley
Zero-based budgeting is a budgeting method where the company starts from 'zero' each year no project or department is considered pre-approved, and all proposed expenditures must be
justified before being included in the plan. It has advantages due to the detailed review of
expenditures and the focus on making sure all activities help support the company big
picture. 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. It is especially useful for service departments such as
stores, maintenance, marketing, finance, etc., for discretionary costs such as research and
development and for public sector organizations such as local authorities. It is important that
managers involved in ZBB examine their current practices very carefully. The traditional
approach to budgeting is to take the previous year's budget and to add on a percentage to
allow for inflation, other cost increases and increases in production volumes. In addition there
may be other adjustments for specific items such as an extra worker or extra machine. The
advantage of incremental budgeting is that it is an easy, quick and cheap method of preparing
budgets.
The zero-based budgeting is different than traditional budgeting techniques due to the
analysis of alternatives. Managers must identify alternative methods of performing each
activity first, such as evaluating the costs and benefits of making a project or outsourcing it,
or centralizing versus decentralizing operations. Zero-based budgeting addresses such
problems that can occur with traditional rolling budgets. In zero-based budgeting, each dollar
spent by management must be justified with a detailed account of what will be purchased,
how many labor hours are needed, what problems will be faced, and so forth. This allows
management an opportunity to review operations in depth and make recommendations for
changes to if necessary. The zero-based budgeting process helps managers identify
redundancies and duplications among different departments, concentrating on the dollars
needed for proposed programs as opposed to percentage increases or decreases form the

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previous year. According to Lin (1979) in todays dynamic business managers should use
zero base budgeting system in production and sales unit because it is really flexible than
traditional incremental budgets which is inappropriate for todays dynamic business.

2. Theme of the Study

The main theme of this assignment is the creation of the successes and failures of Zero Base
Budgeting programs. This is the breakdown of proponents of Zero Base Budgeting to
integrate Zero Base Budgeting into the firm's overall planning process, and an lack of
research designed to review the effectiveness of Zero Base Budgeting in that planning
process.
As the illustration of Lin's work, I developed two main propositions. They are the quality of
the planning effort will improved by the combination of budget generation into a general
planning framework and output oriented units can utilize traditional incremental budgeting
more appropriate while service oriented units can utilize a Zero Base Budgeting planning
model more effectively.

3. Issue of the Study

The major issue of this assignment is to developing the importance of integrating budget
development into the planning process and to test the comparative merits of Zero Base
Budgeting as compared to traditional incremental budgeting.

4. Analysis & Interpretations

Based on a field test straddling two years data I tried to analyze this report.

4.1 A preliminary test of the planning framework:

In this study three computing centers at universities participated who are separate, but very
similar. One computing centre use as a test group and the other two use as control group. The
test group used Zero Base Budgeting as an integral part of the planning process while the
control groups use only traditional incremental budget planning. All three computing centers
used an integrated planning framework. The main difference among the centers was the

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model they used for budgeting. Budgeting is a process. This means budgeting is a number of
activities performed in order to prepare a budget. A budget is a quantitative plan used as a
tool for deciding which activities will be chosen for a future time period. Zero-base budgeting
(ZBB) and traditional incremental budgeting are the types of budgeting.
Test Group
Enrollment
Institutional budget
Computing budget
Primary hardware supplier
Year computer centre established
Same EDP managers for last two years
Budgeting approach prior to field test

8500
$14,700,000
$538,000
IBM
1964
Yes
incremental

Control Group
number 1
10,000
$13,600,000
$423,000
IBM
1966
Yes
incremental

Control Group
number 2
7600
$23,000,000
$865,000
IBM
1962
Yes
incremental

4.2 Operationalizing the model

The major focal point of a university's computing effort must be the support of instructional
and research programs. The effectiveness of the Zero Base Budgeting model is evaluated in
terms of its contribution to improving, over time, the computing function's support of these
activities. Services commonly required by university computing centre users can be
categorized as follows:
1. Keypunch machines
2. Work areas (tables, chairs, storage facilities)
3. Consulting assistance for students
4. Consulting assistance for faculty
5. User documentation (reference manuals, user's guide, newsletter, etc.)
6. User training sessions
7. Programming services for user projects
8. Computing equipment
9. Processing of computer jobs
10. Specialized software

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11. Equipment access

12. Compute; terminals
13. Computer plotting
14. Optical scanning
For the test group, to establish budgets for the previously delineated services Zero Base
Budgeting model was used. Control groups used traditional integrated planning to allocate
resources. The major difference between test and control groups was the deployment of the
Zero Base Budgeting and traditional integrated budgeting models respectively.

4.3 Hypotheses
To test the relative effectiveness of the ZBB and TIB budgeting models in the computing
centers three hypotheses were developed. The more important a service is to the user, the
greater is the level of that service that should be provided by the computing centre. This
concept is tested via the following null hypothesis:
Ho l: Two years after implementing ZBB, the improvements in the correlation between the
importance and level of services offered will not be greater for the test group than for the
control groups.
Faculty members were the only users who required both research and instructional computing
support continuously during a planning cycle.
Hypotheses 2 and 3 address user attitudes towards computing service efforts:
H02: Two years after implementing ZBB, attitudes toward the computing centre's support of
instructional activities will not indicate a greater improvement among faculty in the test
group than among faculty in the control group.
H03: Two years after implementing ZBB, attitudes toward the computing centre's support of
research activities will not indicate a greater improvement among faculty in the test group
than among faculty in the control groups.
Two years represented two planning cycles for all participating computer centers.

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4.4 Data Collection

A questionnaire consisting of 16 questions was used for data collection. Data used to test H 1,
derived from 14 questions pertaining to the different services, was provided by the computing
centers. Respondents give their response through seven point Likert scales. Hypotheses 2 and
3 were tested by using data generated from two items. Specifically, users were asked to
evaluate computing services available to support instructional activities. Then they were
asked the same question regarding research activities.

4.5 Subjects
All faculty members who had actively utilized computing services at their respective
universities for the past two or more years were surveyed. Test group comprised 25 faculty
members while control groups I and II comprised 14 and 27 faculty members, respectively (n
= 66). All faculty members returned their questionnaires, giving a 100 per cent response rate.
This remarkable success was made possible because each user was accessible on campus and
could be easily contacted for follow-up on non-returned questionnaires.

4.6 Results of the Hypothesis

For Hol, data analysis consisted of performing correlation analyses between the importance
and service level of each service for the then-test and posttest time periods. The correlation
coefficients were transformed using Fisher's Z transformation. The Z values were used to
compute net improvement scores for the test and control groups by subtracting then-test Z
values from posttest Z values. The results of these computations are presented in Appendix 1
and 2. The scores of the test group are higher than those of the control group. This provides
support for the efficacy of ZBB in this service oriented unit. The net improvement scores
were used to conduct t-tests for statistical testing (Appendix 3). The results of this test
indicate the improvement of the test group is significantly greater than that of either control
group. Therefore, support for the positive relative influence of the ZBB budgeting model on
meeting user demands is evident in Appendix 3. A second analysis was conducted which was
designed to consider the relative importance of each service. An importance index was
computed by dividing the mean importance score for each service by the total of all mean
importance scores. The result was a relative importance index value or weight for each
service. The previously computed Z values were then multiplied by the importance index and
totaled. Again, the test group's improvement exceeds both control groups (Appendix 2 & 3).
The test group's final score is also greater than that of both control groups. The data in
Appendix 2 indicate a net improvement of faculty attitudes toward computing support for
instructional programs at all three institutions. The test group with an improvement of 2 8
does, however, demonstrate a greater improvement than that of control groups I and II. Also
of interest is that although the test group started with the lowest score, 3 1, it finished with the

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highest score 5 9. Appendix 3 indicates that the test group's relative improvement is
significant at the 5 per cent level. Therefore, these data also provide support for Hypothesis 2.
Lastly, faculty members were asked to evaluate computing services available to support their
research activities before and after the two year period (Hypothesis 3). Again, the test group
scores indicate greater improvement than that of either of the two control groups (Appendix
2). As in the previous discussion, the test group started with the lowest score 3 4 and finished
with the highest score 5 6. Appendix 3 indicates significant (p < 0 05) differences between
the test group and both control groups which provides substantial support for the third
hypothesis.

Summary of Results:
Ho1: Importance and adequacy of service

Mean score (Before)

7.5705
2.4621
9.1767

7.0864

2.5946
8.3045
5.7099

Test

Control 1

Control 2

14.6569

6.7146

Mean Scorre (after)

Net Improvement (After before)

Ho2: Attitudes towards support for instructional activities

Mean score (before)

2.8
5.9
3.1

1.3
4.8
3.5

1.3
4.7
3.4

Test

Control 1

Control 2

Mean score (after)

Net Improvement (after before)

Ho3: Attitudes towards support for research activities

2.2

1.2

1.3

5.6

4.7

4.8

3.4

3.5

3.5

Test

Control 1

Control 2

Mean score (before)

Mean score (After)
Net improvement (after
before)

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Significance Between test And Control Groups:

Ho1: Importance and adequacy of service

26

26

1.75
Test and Control
group 1

1.92

Value
Degree of freedom

Test and Control

group 2

Ho2: Attitudes towards support for instructional activities

50
2.4
2.55
Test and Control
group 1

3.22
tTest and Control
group 2

Value
Degrees of freedom

Ho3: Attitudes towards support for research activities

50
40
30
20

Degree of freedom

10

Value

0
Test And Control
Group 1

Test and Control

Group 2

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5. Recommendation & Conclusion:

In an organization the manager can have some confidence that a well developed and
implemented planning program using ZBB should result in superior performance for the
firm's service functions. A zero-based budgeting system demands that the manager justify the
entire budget in detail and explains why the company should spend the money in the manner
proposed. This approach differs from traditional budgeting techniques as it emphasizes the
analysis of alternatives. The three null hypotheses which cover three primary areas of user
demand in this research setting were strongly rejected. One may conclude that in this service
oriented unit, the ZBB model applied in an integrated planning framework resulted in higher
quality user service when compared to the standard TIB model. Zero-based budgeting
requires a program existence to be justified in each financial year, as opposed to simply
basing budgeting decisions on a previous years allocation. It provides a systematic method
of planning company financial resources. It may require an extensive amount of time and
paper work. A combination of zero based budgets with traditional budgeting spreads the
workload involved in justifying new budgets and is one possible method by which zero-based
budgeting can be incorporated into current budgeting techniques.

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Reference
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Appendix
Appendix 1:

Appendix 2:

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Appendix 3:

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