Zero Base Budgeting (ZB8) As the name suggests, it start from zero or clean slate. In ‘other words, the new budget is not linked with the figures of previous budgets but it is prepared on the basis of new estimates, new analysis and latest data. Thus, ZBB reviews a programme or project from scratch. T The budget, in this technique, is reviewed on assumption that_no expenditure is allowed. The manager proposing 6 the project will have to justify that project is essential and the amount proposed for it is reasonable. No activity or expenditure is allowed simply because it was being allowed or done in the past.Features of Zero Base Budgeting 1, Totally Afresh Consideration 2. Justification for every amount of Expenditure 3. Cost Benefit analysis 4. Linked to corporate goals 5. Participation at all levelsSteps in Zero Base BudgetingStep 1: Identifying the decision units © There can be many decision units in an organization, ‘© Each cost center, like the marketing department, production department, human resource department, research, and development department, etc., acts as a decision unit. © A decision unit can be a single activity or a cluster of activities that can be independently and meaningfully identified. © Every decision unit should be separate from each other. © The manager of each decision unit has to justify the expenses and required budget allotment for his decision unit. © The justification given by manager should not be based on the prior period budget. =& Step 2: Making Decision Packages ad B 7 a a tne ae ecto age woe a Opt Pualastin Op. ifkoya "ade under one decision unit Every decision package should cover the following. xa é oR diotermatin: A“ + The task for which the decision package has been made. ~ + Analyzing the need for the task. » Objectives and goals of broader decision unit of which itis a part. 7 » Objectives and goals of the decision package. » Analysis of the technical and operational practicality of the task. » Analyzing the alternative course of action.pn we : Decision Oona Step 2: Making Decision Packages oo Up Under this step small scale decision packages will be fen Opt sizhep tap Made under one decision unit ’e Every decision package should cover the following ces hy Sbietermation: 124 5 > The task for which the decision package has been made. ~ > Analyzing the need for the task. > Objectives and goals of broader decision unit of which itis a part. 7 » Objectives and goals of the decision package. > Analysis of the technical and operational practicality of the task. » Analyzing the alternative course of action.weaken ee Step 2: Making Decision Packages _f Under this step small scale decision packages will be nin, Opt peach op ‘a made under one deckionu : ‘* Every decision package should cover the following i} & (Ax diatormation: 3.12 24 Bt > The task for which the decision package has been made. ~ JAnalyzing the need for the task. Objectives and goals of broader decision unit of 6 which it is apart. # » Objectives and goals of the decision package. » Analysis of the technical and operational practicality of the task. » Analyzing the alternative course of action. saied‘Step 3: Ranking Decision Packages © In this step rank is assigned to all the decision packages under one decision unit and among various decision units. © This ranking of decision packages is done on the basis, of Cost- Benefit Analysis. ‘© However, the top management have all the rights to select or reject any decision package.‘Step 4: Allocating available resources © Under this step funds are allocated to decision packages on the basis of their ranking. © This step helps in the optimum utilization of scarce resources. ‘Step 5: Monitoring and Controlling In the last step the funded decision packages are monitored closely to check whether the allocation of resources is done in an accurate manner or any change is needed in the decisions taken previously.Advantages of Zero base Budgeting Allocation of Resources according to priorities 72. Justification of each activity _2.No Arbitrary cut or Increase in Budgets <7 _7-4. Linkage with the Enterprise Objectives al Knowledge of wasteful expenditure 6. Management by Objectives 7.Operational Efficiency _, 78. Motivational impact Limitations of Zero Base Budgeting 1. Expensive method 2. Conflicts in ranking 3. Short-term benefits 4. Problem in evaluation of qualitative benefits 5. Time consumingMeaning of Performance Budgeting * A performance budget is one that reflects. both the input of resources and the output of services for each unit of an organization. ... This type of budget is commonly used by government bodies and agencies to show the link between taxpayer funds and the outcome of services provided by federal, state, or local governments.Characteristics of Performance Budgeting * Emphasis on Objectives & Goals * Functional Classification * Financial & Physical Plan * Long-term Planning * Cost-Benefit Analysis * Allocation of ResourcesObjectives of Performance Budgeting * Clear Presentation of Objects & Targets * Better Budget Review * Helps in Decision Making * Accountability & Control * Effective AuditStages for Performance Budgeting * Setting Goals & Objectives * Formulation of Programmes * Allocation of Resources * Determination of Performance Criteria for Programmes * Preparation of Budgets * Implementation of the Budget * Performance EvaluationMarginal Costing BiANGLE OF INCIDENCE The angle, which results due to intersection of total cost line and sales line, is known as tnéle of incidence. It indicates the rate of profit on sales. It is somewhat the same what we have preg PY Ratio in mathematical form of Break-even analysis. If this angle is higher, it is Presi at th is higher. ;, a business concern having Margin of saree rat’ Of Profit on sales is Normally, a b——— eee B, BREAK-EVEN CHART even point can also be computed graphically, A break-even chart is a graphical ropreneataton af mdepnal coting, Te break-even chart reveals a pltoria view at thy ‘between costs, volume and profit. It shows the break-even point and also cntimated profits or loss at various levels of output. The break-even point ax indicated in the chart inthe point at which the total cost line and the total sales I ‘According to Matz, Curry and Frank, “A break-even chart can be defined in graphic form ofthe relationship of production and aales to profit” ‘According to J. Betty, break-even is a chart, which representa the following (i) Profit or loa at different level of production G)) Difference between marginal cost and fixed cost, (ii) Margin of nafety (iv) Broak-oven point where there is neither profit nor los, (v) Increasing rate of profit at one unit of production, (i) Contribution and profit volume relationship. ASSUMPTIONS OF BREAK-EVEN CHART ‘Ther are numberof assumptions which are made while drawing a break-even chart, such as (i) All conta can be separated into fixed and variable costa. (i) Fixed costa remain constant at all level of activity, (ii) Variable cost fluctuates directly in proportion to changes in the volume of output, (iv) Selling prices per unit remain constant at all levels of activity, (\) ‘There is no opening or closing stock. (i) There willbe no change in operating efficiency. (vii) Product mix remains unchanged or there is only one product. (vil) ‘The volume of output or production is the only factor which influences the cost ADVANTAGES OF BREAK-EVEN CHARTS Computation of bre ion of fae by ty eae Sa eee of tre nd prt ni 1; dnformation in Simplest Form : Break-even chart provides information in very ianebn, TIGi i erly understandable even toa layman. The whole dea of the pretern 2, Helpful in Managerial Divisions : It is ful to the : very use! management for taking varios ele ar one Because the chars studies the relationship of cost, volume and profit at levels of output and that of chars hanes in fxed conte and variable cots at various clearly with the help of break-even chart.” “/n# Price on the profits can be depicted very 3, Knowledge about Profitabiti eee analysing the profitability of Bde he breakeven charts help in knowing and pede lucts under different circumstances. fe conse Planning and oatin: Abreak-oven chart i very useful for forecating 5. Helpful in Cost Control : The breakeven chart is am: tool for control of costs as it shows the relative importance of ined cous nthe toa eet of produc 6, Determination of B.E-P. as well as Profits : Besides determining the break-even point, profite at various levels of output can also be determined with the help of break-even chart. 7, Helpful in studying Comparative Efficiencies : The break-even charts can also be used to study the comparative plant efficiencies of business, indicatesLIMITATIONS OF BREAK-EVEN CHARTS Despite many advantages, a break-even chart suffers from the following limitations : 1. It is based on a number of assumptions, which may not hold good under all the circumstances : A break-even chart is based upon a number of assumptions, discussed above, which may not hold good under all circumstances. For example, fixed costs do not remain constant after a certain level of activity, variable costs do not always vary in direct proportion to changes in the volume of output, because of the law diminishing and increasing returns; selling prices do not remain the same for ever and for all levels of output due to competition and changes in the general price level, etc. : 2. It Supplies Limited Information : Break-even chart supplies only a limited information, We have to draw a number of charts to study the effects of changes in the fixed costs, variable costs and selling prices on the profitability. In such cases, it becomes more complicated and difficult to understand. 3. Ignorance of Important Considerations : Break-even charts present only soot volume profit relationships but ignore other important considerations such as the amount capital investment, marketing problems and government policies etc. an 4. It does not suggest any remedies regarding Managerial Decisions * & break-even chart does not suggest any remedies to the management as a tool of manageme lecisions. 5. Static View : More often, a break-even chart presents only a static view ofthe problem under considerations. : chart _ 6 It fails to explain the effect of various product mixes ; A single break-even fails to explain the effect of various product mixes in the profit. Tt ionnras the sin- —- Latenan nenduction and sales.