Zero base budgeting:

Zero base budgeting: Zero Base Budgeting is a method of budgeting whereby all activities are revaluated each time a budget is formulated. It is an approach to budget review and evaluated that requires a manager to justify the resources requested for all activities and projects, including ongoing activities and projects, in rank order. Each functional budget start with the assumption that the function does not exist and it is at zero cost. In other words, it is an expenditure control device where without reference to the past budget or achievement each divisional head has to justify the requirements of funds for each head of expenditure and prepare the budget accordingly.

             According to Leonard Merewit “Z.B.B is technique which compliments and links the existing planning, budgeting and review process. It identifies alternatives and efficient methods of utilizing limited resources and effective attainment of selected benefits. It is a flexible management approach which provides a credible rationale for reallocating resources by focusing on a systematic review and justification of the funding and performance level of correct programming or activities.”

             The budgeting function starts from zero and not on the basis of trends or historical figures adjusted for inflation and other conditions. It starts from the basic premise that the budget for the next year is zero and every process or expenditure has then to be justified in its entity in order to be included in the next year’s budget. Important point of this Budget is that the burden of proof thus shifts to each manager to justify why the money sho0uld be spent as all and to indicate what would happen if the proposed activities are not carried out and no money is spent.

   Steps involved in Zero Base Budgeting:

(i)                   Corporate objective should be established and laid down in details.

(ii)                 Decision units are identified by dividing the organisation according to functions or departments.

(iii)                The activity of each function or department is described, analysed and documented.

(iv)                The targets and objectives of each activity are clearly determined ignoring existing budget.

(v)                  The performance assessment and measurement criteria for each activity are clearly defined.

(vi)                Each separate activity of the organisation is described in decision package.

(vii)               Each activity or decision package is evaluated and ranked by cost benefit analysis.

(viii)             Available resources are directed towards alternatives in order of priority to ensure optimum results.

   The advantages of Z.B.B. are as follows:

(i)                   It provides a systematic approach for the evaluation of different activities and ranks then in order of preference for the allocation of scarce resources.

(ii)                 It adds psychological impetus to employ to avoid wasteful expenditure.

(iii)                It is planning tool for management which helps in identification of wasteful and obsolescent items of expenditure.

(iv)                It renders greater flexibility on the top-level management in the allocation of available financial resources while choosing between different levels of particular activity.

(v)                  It ensures the optimum use of available resources as the allocation is based on raking of the competing claims of funds by their relative cost benefit analysis.

(vi)                Under it each activity is thoroughly examined and justified.

(vii)               Since this system requires participation of all manages in preparation of budgets, responsibility of all levels of management in successful execution of budgetary system can be ensured.

All above benefits through implementation of zero base budgeting makes the managers to work more efficiently and effectively in decision making problems.