Wednesday, September 16, 2009

ZERO BASED BUDGETING

ZERO BASED BUDGETING
Zero Base Budgeting has been defined as "a Planning and Budgeting process which requires each Manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why he should spend any money at all. This approach requires all activities be identified in 'decision packages' which will be evaluated by systematic analysis and ranked in order of importance
The traditional budgetary system relies on the present accounting data base. Thus, if salaries and wages of the employees have increased by five per cent every year on an average, the salaries and wages budget for the coming year is fixed by increasing previous years expense figures by five per cent. This system of budgeting has served well to exercise a measure of financial control and discipline in an organisation. However such a measure is not enough.

1.2 ZBB is a technique which complements and links the existing planning, budgeting and review processes. It is a management tool which provides a systematic method for evaluating all operations and programmes current or new, allows for budget reductions and expansions in a rational manner and allows the re-allocation of resources from low to high priority programmes. It is also a tool for the decision makers enabling them to frame range of options and choose priorities among alternative programmes in relation tor resource availability.
In ZBB. a unit is required lo justify not only the new activities and the funds therefor but also the ongoing activities. The ZBB requires identification and sharpening of objectives, examination of various alternatives ways of achieving through cost-benefit and cost-effecetiveness analysis, prioritisation of objectives and programmes which have outlived their Utility.
1.3, Suppose in an administrative set up, six clerks are employed as comptists for doing the work of addition and substractions. Recently the administration provided the staff with electronic calculating machines and also installed personal computer, with the result, the comptomer clerks have either no work or very little work. The Administration would fail to see that the clerks could be effectively redeployed or dispensed with. The traditional budgetary system would ensure that their salaries were paid till retirement for very little or no work.
The above example, although exaggerated can correspond to many situations in our exiting organisation where ‘dead wood’ abound in many areas. The ZBB helps to identify such areas of wasteful extpenditure and if desired can also suggest alternative uses of items of expenditure that are presently wasteful in nature.
The ZBB is an extension of Performance Budgeting as The ZBB technique links the budget with corporate objective.
1.4 In the Railway system/preparation of works programme well in advance partly suits the req uirements of ZBB. The same cannot be said so in respect of Revenue Budget. The technique of ZBB will help certain specialised areas especially whenever there is switch over from one system to another (e.g. Steam traction to Diesel. Diesel to electric and from manual to Computerisation etc.) indentify the 'Dead Woods',
1.5 HOW ZBB DIFFERS FROM TRADITIONAL BUDGETING
o A traditional budget is function-oriented, a ZBB is programme or project oriented
o in traditional budgeting, Justification is required only for new programmes, existing programmes are sell perpetutating whereas ZBB requires all programmes and projects are to be justified.
o traditional budgeting views critically only cost increases; ZBB critically examines existing levels of expenditure.
o traditional budgeting is input oriented; ZBB is output oriented
1.6 STEPS INVOLVED IN ZBB
1. Define the objectives of the budgeting exercises to achieve cost reduction in areas such as staff overheads, or to analyse and drop projects that are unlikely to achieve corporate objectives or to restructure the organisation itself.
2. Decide on the strategy for implementation, here the object is to decide whether to implement the ZBB technique in one particular area.
3. Develop decision Units: This is the key to effective ZBB, Each decision unit must be independent of all other units so that if the cost benefit analysis proves unfavourable the unit can be dropped.
4. Completion of decision package : After the decision units are identified a decision package for each such unit is made up.
5. Rank all packages : Once the decision packages are completed, all the packages are ranked according to the cost-benefit analysis,
6. Implement : Implementation process consists of simply acccpting those projects that have a positive cost benefit analysis.
1.7 CONCLUSION : To some, ZBB , is simply an old idea dressed up in a new name, To others, ZBB symbolises a new approach to management. But nobody would question its real value.

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