ZERO BASED BUDGETING

Meaning And  Definition of ZBB:

ZBB in management accounting involves preparing the budget from the scratch with a zero-base

According to "CIMA" London: ZBB is defined as a method of budgeting where by all activities are revaluated each time a budget is set. Discrete levels of each activity are valued and a combination is chosen to match funds available.

EXAMPLE 

Say a manufacturing dept. spent $10 million last year. So in current year, it can either increase or decrease the requirement to $11 million or $9 million respectively. ZBB involves calculating all the expenses of the dept. and justifying each of them. This reflects the actual requirement which may be $10.6 million.

YOU CAN ALSO READ:- BUDGETING CONTROL

FEATURES OF ZERO BASED BUDGETING

- lt is approach to budgeting which starts with a base zero so that the budget allocations for the future can be justified afresh.

- All activities are re-valued each time a budget i is formulated.

- In its original sense, ZBB meant that no past decisions are taken for granted.

- The focus is not simply on how much' a unit will spend but 'why it need to spend.

- In reality, a Manager is assumed to have minimum amount of funding for basic operation, above which additional funds must be justified.

PROCESS OF ZERO BASED BUDGETING

1) Identification of a task.

2) Finding ways and means of accomplishing the task. 

3) Evaluating these solutions and also evaluating alternatives of sources of funds.

4) Setting the budgeted numbers and priorities.

You can also read :- CAPITAL BUDGETING 

Advantages of ZBB

(1) Inefficient or obsolete operations can be identified and discontinued

(2) Coordination and Communication

(3) It responds to changes in the business environment

(4)Accuracy and Efficiency

(5) Resources should be allocated efficiently and economically

You can also read:- SAMPLING 

Disadvantages of ZBB

(1) It emphasises short-term benefits to the detriment of long term goals.

(2) Lack of Expertise

(3) The management skills required may not be present

(4) High Manpower Requirement

(5) Ranking can be difficult for different types of activities or where the benefits are qualitative in nature.