Master Budget

The master budget is the aggregation of all lower-level budgets produced by a company's
various functional areas, and also includes budgeted financial statements, cash forecast,
and a financing plan. The master budget is typically presented in either a monthly or
quarterly format, or usually covers a company's entire fiscal year.
Zero base budgeting
This budget is the preparation of budget starting from zero or from clean state.

CIMA has defined it “as a method of b budgeting whereby all activities are revaluated each time a budget is
set. Discrete levels of each activity are valued and a combination chosen to match funds available”. In short
an elaborate practice of having manager justifuy activities from the ground up as though they were being
launched for the first time.

Conclusion: Since zero-based budgeting is a cost control technique, it is very important that the
steps to implement zero-based budgeting are properly and wisely followed. There must be a
detailed description of how the allocated funds would be used by each department and how
the organization will benefit from it overall. Though steps involved in zero-based budgeting
process are time-consuming, it provides the most systematic method of allocation of
company’s funds.
 Features of zero base budgeting
1. It reviews a project from scratch on assumption that nothing is to be allowed
2. It deals with all aspects of budget requests of manager. Manager has to justify that a
project is essential and of high priority.
3. It reviews critically both existing and newly proposed activities.
4. It sets priorities in respect of different activities
5. A frank relationship exists between superiors and subordinates.
6. Available resources are directed towards alternatives in order of priority to ensure
optimum results.

ZBB V/S TRADITIONAL BUDGETING

BASIS FOR TRADITIONAL BUDGETING ZERO-BASED

COMPARISON BUDGETING
Meaning Traditional Budgeting alludes to a Zero-based budgeting means
technique of preparing budget that takes a budgeting method, whereby
immediately preceding year's budget as a whenever the budget is set,
base. the activities are re-evaluated.
Focuses on Previous level of Expenditure New economic appraisal
Orientation Accounting oriented Decision or project oriented
Justification Justification of current project is not Justification of current and
required. proposed projects is required,
considering benefits and
costs.
Justification Justification is given by top management Justification is given by the
Authority for the particular decision unit manager for the particular
decision unit.
Priority Mainly to past level of spending, then to Decision unit is divided into
demand for inflation and new programs. comprehensive decision
packages, and ranked as per
their relevance.
Clarity and Lower Comparatively higher
Responsiveness
Approach Routine Approach Straight forward Approach

Zero Based Budgeting Advantages

1. 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 a clear picture of costs against the desired performance.
2. 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
3. Reduction in redundant activities: It leads to the identification of opportunities and more cost-
effective ways of doing things by removing all the unproductive or redundant activities.
4. Budget inflation: Since every line item is to be justified, zero-based budget overcomes the
weakness of incremental budgeting of budget inflation.
5. Coordination and Communication: It also improves co-ordination and communication within
the department and motivates employees by involving them in decision-maki
6. It is highly useful to non-profit or service organizations.
7. Costs may be saved in inefficient operations.
8. Since the resources are allocated on cost benefit terms, there is a better utilization of
resources.
9. It forces the management executives at all levels for active participation in budgeting process.
10. It ensures careful planning.
11. The finance manger gives a clear picture about the extent of finance available and the
consequences of raising the finance.
12. It does not carry any inefficiency and forward the same to next year.
13. It promotes operational efficiency since it is not based on incremental approach.
Generally, the zero based budgeting try to overcome the weaknesses of conventional
budgeting.

Zero Based Budgeting Disadvantages

1. Time-Consuming: Zero-based budgeting is a very time-intensive exercise for a company or a
government funded entries to do every year as against incremental budgeting, which is a far
easier method.
2. High Manpower Requirement: Making an entire budget from the scratch may require the
involvement of a large number of employees. Many departments may not have an adequate
time and human resource for the same.
3. Lack of Expertise: Explaining every line item and every cost is a difficult task and requires
training the managers. If managers do not understand correctly the idea at the back of ZBB, it
cannot be introduced successfully.
4. ZBB may encourage the false idea that all decisions have to be made in the budget.
Management must be able to meet unforeseen opportunities and threats in all times and must
not be restricted from carrying out new ideas simply because they were not approved by a
decision package cost benefit and ranking analysis.
5. In the case of large-scale business organization, a number of decision packages are prepared
and it involves more expenses.
6. More paper work is involved in the preparation of ZBB. ZBB will lead to an enormous increase
in paper work created by the decision packages. The assumptions about the cost and benefit in
each package must be continually updated, and new packages developed as soon as new
activities emerge.
7. Another problem with ZBB is the difficulty of ranking process. Managers face the following
three common problems:
 The large number of packages they have to rank.
 There is often a conceptual difficulty in having to rank packages which they regard as
being equally vital, for legal or operational reasons.
 It is difficult to rank completely different types of activity, especially where activities
have qualitative rather than quantitative benefits, such as spending on staff welfare and
working conditions, where ranking must equally be entirely subjective.
8. Managers can be threatened by zero based budgeting.
9. The manager may develop fear and oppose new ideas and changes.
10. There is personal bias in the ranking of decision packages.
11. Administration and communication of ZBB may create many critical problems.

Conclusion: Zero-based budgeting aims at reflecting true expenses to be incurred by a

department or a state [in the case of budget making by the government]. Although time-
consuming, this is a more appropriate way of budgeting. At the end of the day, it is a company’s
call as whether it wants to invest time and manpower in the budgeting exercise to provide
more accurate numbers or go for an easier method of incremental budgeting.