Cost Accounting Assignment

On
ZERO BASED BUDGETING

Submitted By: Akanksha Saxena PRN 10020242002 MBA-AB 2010-2012 Dated: 30-01-2010

Zero Based Budgeting

WHAT IS ZERO BASED BUDGETING?

Zero Based Budgeting (ZBB) is an approach to budgeting that starts from the premise that no costs or activities should be factored into the plans for the coming budget period, just because they figured in the costs or activities for the current or previous periods. . The managers need to build a budget from the ground up, building a case for their spending as if no baseline existed i.e. to start at zero. They have to justify the entire budget request in detail and why any money should be spent. Resources are not allocated with previous patterns and have to be annually re-allocated and analyzed. Thus it will reveal where resources might be reallocated to better meet the mission, goals and objectives of the organization. For implementing ZBB ranking and prioritizing of decision packages is done which will help in thinking in terms of performance. So we can sum up like it is a tool to To question set assumptions To systematically review and reprioritise the activities To withdraw from long term activities that no longer align properly with an organisations objective.

HISTORICAL PERSPECTIVE OF ZBB

ZBB or some modified version of it has been used in the private and public sectors for decades. The concept of ZBB was first put forward in a crude form by E.Hilton in 1924. Later, the former President of America, Jimmy Carter used this technique successfully in 1962 for federal budgeting process. Now it is getting popular in India since GOI has directed its public sector undertakings to introduce ZBB in their budgeting programs.

STEPS OF ZERO BASED BUDGETING

The practical application of ZBB involves the use of the Decision Package. All budgetary procedures involve an identification of organizational objectives. In the context of these objectives, ZBB involves three stages: Identification of decision units. Development of decision package. Review and ranking of decision packages.

1. Identification of decision units: - The existing organization structure identifies the units in the hierarchy for which budgets are prepared. These could be responsibility centers, cost centers, profit centers, investment centers, program categories or program elements. This is the starting point for identifying decision units for ZBB. Decision units should have the following characteristics: I. A specific manager should be clearly responsible for the operation of the program. II. It must have well defined & measurable impacts and objectives.

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Zero Based Budgeting

2. A document called Decision Package that describes the objectives or purposes of the all the decision units and the actions that could be taken to achieve them is prepared. The decision package explains the specific activity, its goals and objectives, measurement of performance, costs, benefits, and alternative courses of actions. The purpose of mutually exclusive decision packages is to identify for each decision unit the alternative ways of performing its functions so as to enable management to choose the best alternative. 3. Reviewing and ranking of decision Package is the next step. Once the decision packages have been prepared, they are ranked on an ordinal scale i.e 1st, 2nd, 3rd, etc.in order of priority. Priority is set by I. Whether the activity is specifically required by law II. Whether the organization has the resources technical skills to implement the activity III. Whether the package is cost-effective and politically acceptable.

COMPARISON OF ZBB WITH TRADITIONAL BUDGETING

ADVANTAGES OF ZERO BASED BUDGETING

1. Efficient allocation of resources, as it is based on needs and benefits. Thus it drives managers to find cost effective ways to improve operations and detects inflated budgets. 2. It increases staff motivation by providing greater initiative and responsibility in decision-making. 3. Annual review indicates relative worth of the programs and thus ensures no programs continue beyond its productive life. Thereby it becomes easier to identify and eliminate wasteful and obsolete operations. 4. Since it is not incrementing to the last years figures, it is more efficient and relevant budgeting method. Cost Accounting Assignment, 30-01-10 Page 2

Zero Based Budgeting

5. Unexpected events that occur during the financial year can be more readily adjusted for. This is because the basic information for modifying goals has already been generated. 6. It emphasizes on finding alternative methods and also finds opportunities for outsourcing.

ZERO-BASED BUDGETING DRAWBACKS AND SOLUTIONS

1. It takes a considerable amount of time and money to go through the process of reviewing operations in enough detail to justify costs each budget cycle without relying on past expenditures. One solution to this problem is to create a rolling budget every year and perform a zero-based budget every three to five years, or when a major change occurs within the operation. This allows an organization to benefit from the advantages of zero-based budgeting without an excessive amount of work. 2. Likewise, traditional rolling budgets should never strictly rely on a prior-year budget plus a percentage; consideration should always be given to past numbers. In some cases, a zero-based budget may rely on some prior numbers where it is overwhelming to create a budget from scratch. 3. ZBB cannot be applied throughout an organization in entirely the same manner. Some departments can utilize an in-depth study of a zero-based budget while others can use a rolling budget. This is a way to spread the extensive work over a number of years instead of concentrating on one certain year. 4. Furthermore, it is often hard or even impossible for top executives to have the necessary knowledge or time to develop and rank priorities for thousands of packages since its a tedious job requiring great expertise. To alleviate this problem, managers, after ranking their own packages, can have their top executives rank the packages of all the managers that report to them. Another solution is for each level of management to rank a certain percentage of packages within its own area of responsibility. 5. Undercuts the strategy of claiming all programs are equally crucial.

REFERENCES
Budgetary control by Rajnish Sood Principles and Practice of cost accounting by N K Prasad and A K Prasad www.mbaforum.com www.referenceforbusiness.com www.accountingformanagement.com www.cipfa.org

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