
Advantages and Disadvantages of Zero Based Budgeting
Zero Based Budgeting is a method of budgeting wherein no base is
Zero based budgeting in management accounting involves preparing the budget from the scratch with a zero-base. It involves re-evaluating every line item of cash flow statement and justifying all the expenditure that is to be incurred by the department.
Thus, zero-based budgeting definition goes as a method of budgeting whereby all the expenses for the new period are calculated on the basis of actual expenses that are to be incurred and not on the differential basis which involves just changing the expenses incurred taking into account change in operational activity. Under this method, every activity needs to be justified, explaining the revenue that every cost will generate for the company.
Contrary to the traditional budgeting in which past trends or past sales/expenditure are expected to continue, zero-based budgeting assumes that there are no balances to be carried forward or there are no expenses that are pre-committed. In the literal sense, it is a method for building the budget with zero prior bases. Zero-based budgeting lays emphasis on identifying a task and then funding these expenses irrespective of the current expenditure structure.Table of Contents
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
To understand the Steps in Zero Based Budgeting, an example is given below to understand how it works.
Let us take an example of a manufacturing department of a company ABC that spent $ 10 million last year. The problem is to budget the expenditure for the current year. There are multiple ways of doing so:
Having understood zero-based budgeting calculation; some of the advantages of zero-based budgeting are stated below:
To have a clear understanding, it is necessary to understand the key differences between the other methods of budgeting like Activity Based Budgeting etc.
Although zero-based budgeting merits make it look like a lucrative method, it is important to know the disadvantages listed as under:
Conclusion: Zero-based budgeting aims at reflecting true expenses to be incurred by a department or a state [in the case of budget making by the government]. Although time-consuming, this is a more appropriate way of budgeting. At the end of the day, it is a company’s call as whether it wants to invest time and manpower in the budgeting exercise to provide more accurate numbers or go for an easier method of incremental budgeting.
References:
Category: Zero Based Budgeting
Zero Based Budgeting is a method of budgeting wherein no base is
Zero Based Budgeting and Activity-Based Budgeting are the most popular budgeting methods.
Zero-based budgeting (ZBB) is a management tool used to control the costs
Zero-Based budgeting and traditional budgeting are the two predominantly used budgeting techniques.
Zero-based budgeting and Incremental budgeting are the two most commonly used methods
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