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Zero-based budgeting is an approach to planning and decision-making which reverses the

working process of traditionalbudgeting. In traditional incremental budgeting, departmental

managers justify only variances versus past years, based on the assumption that the "baseline"

is automatically approved. By contrast, in zero-based budgeting, every line item of the budget

must be approved, rather than only changes.[1]

During the review process, no reference is

made to the previous level of expenditure. Zero-based budgeting requires the budget requestbe re-evaluated thoroughly, starting from the zero-base. This process is independent of

whether the total budget or specific line items are increasing or decreasing.

The term "zero-based budgeting" is sometimes used in personal finance to describe "zero-

sum budgeting", the practice of budgeting every dollar of income received, and then adjusting

some part of the budget downward for every other part that needs to be adjusted upward.

Zero based budgeting also refers to the identification of a task or tasks and then funding

resources to complete the task independent of current resourcing.

the traditional budgeting technique may be quite meaningless in the present context when

management must review or re-evaluate every task with a view to utilize the scarce resources in a

better manner or to improve performance. The technique of zero base budgeting provides a solution

for overcoming the limitations of traditional budgeting by enabling top management to focus on

priorities, key areas and alternatives of action throughout the organisation.

The technique of zero base budgeting suggests that an organisation should not only make decisions

about the proposed new programmes, but should also review the appropriateness of the existing

programmes from time to time. Such a review should particularly be done of such responsibilitycentres where there is relatively high proportion of discretionary costs. Costs of this type depend on

the discretion or policies of the responsibility centre or top managers. These costs have no direct

relation to volume of activity. Hence, management discretion typically determines the amount

budgeted. Some examples are: expenditure on research and development, personnel

administration, legal advisory services.

Zero base budgeting, as the term suggests, examines or reviews a programme or function or

responsibility from scratch. The reviewer proceeds on the assumption that nothing is to be allowed.

The manager proposing the activity has, therefore, to justify that the activity is essential and the

various amounts asked for are reasonable taking into account the outputs or results or volume ofactivity envisaged.. No activity or expense is allowed simply because it was being allowed or done in

the past. Thus according to this technique each programme, whether new or existing, must be

justified in its entirety each time a new budget is formulated. It involves:

dealing with particularly all elements of mangers' budget requests critical examination ofongoing activities along with the newly proposed activities providing each manger a range of choice in setting priorities in respect of different activities

and in allocating resources.

Nature of Zero Based Budgeting: Unconventional

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In contrast to conventional budgeting, zero based budgeting system inunconventional.

It is not based on previous year's budget. It is not formulated by just incrementing the previous year's expenditure for the

current year.

It starts with zero base. It's a clean slate approach. Departmental objectives are decided within the frame work of corporate or

organizational objectives and then broken down into detailed objectives and

activities/tasks.

The resources and therefore, the expenses required to acquire and use those resourcesare calculated at the current market conditions.

Additionally, at every step, questions are asked whether the activities to be undertakento achieve the objectives are value adding and the scopes of improvements in

business, administrative and technical processes are thought of.

Overall cost control and cost management are the important key aspects in drawingthe zero based budget.

The budget thus formulated may be lower than or equal to or higher than the previousyear's budget. But looks like, that it is necessary to allocate and use that kind of

money for better performance and better profitability.

This kind ofbudget seems more realistic and more precise. The expenditures can now be controlled and profits as predicted realized with lot

more surety.

Process of Zero Base Budgeting

Determining the objectives of budgeting: The objective may be 'to effect cost reduction in staffoverheads or it may be to drop, after careful analysis, projects which do not fit into achievement of the

organisations objectives etc.

Deciding on scope of application: The extent to which zero base budgeting is to be introduced has to

be decided, i.e. whether it will be introduced in all areas of the organisation's activities or only in a

few selected areas on trial basis.

Developing decision units Decision units for which cost-benefit analysis is proposed have to be

developed so as to arrive at decisions whether they should be allowed to continue or to be dropped.

Each decision unit, as far as possible should be independent of other units so that it can be dropped if

the cost analysis proves to be unfavourable for it.

Developing decision packages : A decision package for each unit should be devel-oped. While

developing a decision package, answers to the following questions would be desirable:

Is it necessary to perform a particular activity at all? If the answer is in the negative, there isno need to proceed further.

How much has been the actual cost of the activity and what has been the actual benefit both intangible as well as intangible forms?

What should be the estimated cost of the level of activity and the estimated benefit from suchactivity?

Should the activity be performed in the way in which it is being performed, and what shouldbe the cost?

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If the project or activity is dropped, can the unit be replaced by an outside agency?

After completing decision packages for each unit, the units are ranked according to the findings of

cost-benefit analysis. Essential projects are identified and given the highest ranks. The last stage is

that of implementing the decision taken in the light of the study made. It involves the selection and

acceptance of those projects which have a positive cost-benefit analysis or which are capable of

meeting the objectives of the organisation.

Advantages of Zero Base Budgeting

It provides the organisation with systematic way to evaluate different operations andprogrammes undertaken. It enables management to allocate resources according to priority of

the programmes.

It ensures that each and every programme undertaken by managers is really essential for theorganisation, and is being performed in the best possible way.

It enables the management to approve departmental budgets on the basis of cost-benefitanalysis. No arbitrary cuts or increase in budget estimates are made.

It links budgets with the corporate objectives. Nothing will be allowed simply because it wasbeing done in the past. An activity may be shelved if it does not help in achieving the goals of

the enterprises.

It helps in identifying areas of wasteful expenditure and, if desired, it can also be used forsuggesting alternative courses of action.

It facilitates the introduction and implementation of the system of `management byobjectives'. Thus it can be used not only for fulfillment of the objectives of traditional

budgeting, but also for a variety of other purposes.

Disadvantages

1. More time-consuming than incremental budgeting.2. Justifying every line item can be problematic for departments with intangible outputs.3. Requires specific training, due to increased complexity vs. incremental budgeting.4. In a large organization, the amount of information backing up the budgeting process

may be overwhelming.

5. its implement on big scale not on small scale industries

It is contended that zero base budgeting is time consuming. Of course, it is true, but it happens only

in the initial stages when decision units have to be identified and decision packages have to be

developed or completed. Once this is done, and the methodology is clear, zero base budgeting is

likely to take less time than the traditional budgeting. In any case, till such time the organisation is

properly acclimatized to the technique of zero base budgeting, it may be done in a way that all

responsibility centres are covered at least once in three or four years.