Zero base budgets, Financial Management

Zero base budgets: this is a new technique, which was first used by the US Department of Agriculture in 1961. Texas instruments, an MNC, have used it in the private sector.  But, it was Peter.A.Pyhr who had planned its logical basic framework in 1970 and effectively developed, implemented and popularized the use of Zero base budget in private sector. Therefore, he is identifies as the 'father of Zero base budget'. The technique became more popular in USA when the then President of USA, Mr.Carter, in 1979, had issued a mandate asking for the use of Zero base budget throughout the federal government agencies. although it had become Popular in many countries, mainly all the common wealth countries, in India, in spite of the variety of efforts of the Institute of Chartered Accountants of India and the Institute of Costs and Works Accountants of India, it had not achieved popularity.

ZBB has been described by many management experts in several ways.  Few of those definitions are -

'ZBB is a budgeting process and an operating planning which requires each manager to justify his entire budget requests in detail from scratch. every manager says why he should spend money at all. This approach requires that all activities be recognized as decision packages which would be evaluated by systematic analysis ranked in order of importance'

'ZBB is a management tool which offers a systematic method of evaluating all operations and programs, current allows for budget reductions and expansions in a rational manner and allows re-allocation of sources from low to high priority programs'

ZBB is not an old budget with incremental changes, as in the case of an incremental budget.  It begins with a scratch or a zero level and if an item is found to be necessary it is integrated in the new budget, and if it is necessary, how much amount should be budgeted for.

ZBB has several advantages to the management which are as follows:-

1) It offers a solution for all the limitations of traditional budgeting by enabling the top management to focus on main areas, alternatives and priorities of action throughout the organization.

2) It allows the management to concentrate only on essential programs

3) It allows the management to approve departmental budgets on the basis of cost benefit analysis.

4) It aids in identifying wasteful expenditure, and if desired, it can also be used for suggesting alternative courses of action.

5) It can be used for introducing the system of Management by objectives.

Although there are several advantages with this type of budgeting, there are several disadvantages also associated with its use which are as follow -

1) Successful implementation of Zero base budget requires top management support.  Its absence may lead to implementation problems.

2) There are further problems related to the implementation of the ZBB program like fixing of appropriate authority and responsibility for preparing the budgets, fixing the smallest amount of effort required, etc.

3) It is costly and may not suit smaller firms.

4) It is time consuming and may not be applicable in taking emergency decisions.

Posted Date: 10/15/2012 8:22:11 AM | Location : United States







Related Discussions:- Zero base budgets, Assignment Help, Ask Question on Zero base budgets, Get Answer, Expert's Help, Zero base budgets Discussions

Write discussion on Zero base budgets
Your posts are moderated
Related Questions
We defined the conversion premium as the difference between the market price of the convertible and the conversion value. The conversion premium ratio tells us ab

MONOPOLY Several governments consider it necessary to prevent or control monopolies. A untainted monopoly exists when one organisation controls the production or supply of a go

Introduction to Financial Management Companies don't work in a vacuum, isolated from everything else. It transacts andinteracts with the other entities present in economic envi

Question 1 There are several elements which you can take into consideration, while budgeting a project. Describe these elements Question 2 Explain the different methods/source

Q. Major objective of working capital management? The major objective of working capital management is to decide the optimum amount of working capital required. Usually managem


What is the meaning of Breakeven point?

Revenue bonds are the securities issued for financing an entity for general      public-purpose. The securities issued for entity financing are backed up with the

When an investor buys a bond in between coupon payments, he is supposed to compensate the seller with the coupon interest earned on the bond from the last coupon

Would exchange rate changes all time increase the risk of foreign investment? Discuss the condition within which exchange rate changes may actually decrease the risk of foreign inv