Zero Based Budgeting


It is also referred to as priority based budgeting. It is a cost benefit approach budgeting where it is assumed that the cost allowance is Zero for any item until the manager responsible justifies its existence in terms of costs and benefits.

CIMA definition: A method of budgeting whereby all activities are re-evaluated each time the budget is set. It is concerned with alternative means that established activities have been compared with alternative uses of the same resources.

It takes away the implied right of existing activities to continue receiving resources unless they can be shown to be the best use of such resources.

Stages of Implementation

  1. Definition of decision package.

This is the comprehensive description of the organizations functions or activities.

  1. Evaluation and ranking of packages.

This is on benefit basis.

  1. Resource allocation according to priorities.

Advantages

  • More efficient allocation of resources.
  • Focus attention on values for money and makes clear relationship between input and output.
  • Develops a questioning altitude and makes it easier to identify obsolete, inefficient and less cost effective operations.
  • Leads to greater staff and management knowledge of operations.

Disadvantages

  • Time consuming.
  • High skills required.
  • May encourage wrong impression that all decisions must be made through budgets.
  • Short – term benefits may be emphasized to the detriment of long-term benefits.

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