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Zero Based Budgeting (ZBB)
- Zero-based budgeting is an approach to plan and prepare the budget from the scratch. Zero-based budgeting starts from zero, rather than a traditional budget that is based on previous budgets.
- The primary objective of zero-based budgeting is the reduction of unnecessary cost by looking at where costs can be cut.
Differences between Traditional Budgeting and Zero Base Budgeting
- In traditional Budgeting, the previous year’s budget is taken as a base for the preparation of a budget. Whereas, each time the budget under zero-based budgeting is created, the activities are re-evaluated and thus started from scratch.
- Traditional Budgeting works on cost accounting principle, thereby, it is more accounting oriented. Whereas the zero-based budgeting is decision oriented.
- In the traditional budgeting, justification of the line items and expenses are not at all required. On the other hand, in zero-based budgeting, proper justification is required, taking into account the cost and benefit.
- In traditional budgeting, the top management take decisions regarding any amount that will be spent on a particular product. In contrast, in zero-based budgeting, the decision regarding the spending a specific sum on a particular product is on the managers.
- Zero-based budgeting is better than traditional budgeting when it comes to clarity and responsiveness.
- Traditional budgeting follows a monotonous approach while zero-based budgeting follows a straightforward approach.
Zero Based Budgeting Advantages
- Efficiency: It helps a business in the allocation of resources efficiently (department-wise) as it does not look at the previous budget numbers.
- Accuracy: This budgeting approach makes all departments relook every item of the cash flow and compute their operation costs.
- Budget inflation: It compensates the weakness of incremental budgeting of budget inflation.
- Coordination and Communication: It provides better coordination and communication within the department and motivation to employees by involving them in decision-making.
- Reduction in redundant activities: This approach leads to identify doing things by eliminating all the redundant or unproductive activities.
Zero Based Budgeting Disadvantages
- High Manpower Turnover: It require the involvement of a large number of employees. Many departments may not have adequate human resource and time for the same.
- Time-Consuming: It is highly time-intensive for a company to do annually as against incremental budgeting approach, which is a far easier method.
- Lack of Expertise: Providing an explanation for every line item and every cost is a problematic task and requires training for the managers.