Zero base budgeting is a means of eliminating unnecessary expenditure and increasing profitability. The technique was device originally to help management in the difficult task of allocating resources more efficiently between project and other cost item, in service and support areas.
It was first
introduced by Peter Physs in 1969 at Texas instrument incorporation in U.S.A
since that time it has gain considerably following in U.S.A and Canada but it
has been slow to develop in UK. It was use by Jimmy Carter when he was the
governor of Georgia.
Zero base budgets
require a budget to be prepared from a Zero base. This means that future
budgeted level of expenditure must be justified in their own merit ignoring
past expenditure levels.
Zero base budgeting
therefore is particularly use in certain spending limits for area whose cost
are mainly fixed cost for example, Advertising ,Research and Development and
Adm. Dept. which tend to have a relatively small proportion of variable cost.
The basic approach of
Zero Base budgeting is in three steps.
a)
Each
separate activity of the company or Government is described in the decision
package. A decision package is documents which identifies and describe the
specific activity in such a way that management can evaluate it and rank it in
order of priority against other activities.
b)
Each
activity (Decision package) is evaluated and rank by cost/ benefit analysis.
c)
Resources
in the budget are then allocated accordingly to fund available and the
evaluation and the ranking of the competing packages.
Conventionally
budget are queried when they show increases in the expenditure over previous
years. In Zero base budgeting there should be a positive attempt to eliminate
inefficiency and slack from current expenditure.
ADVANTAGES
The advantages of Zero base budgeting are as follows.
1.
It
is positive to identify and remove inefficiency or obsolete operation.
2.
It adds psychological impetus to employees to
avoid wasteful expenditure.
3.
It
obliges government or an organization to look very close into its cost behavior
patterns in order to decide the effect of alternative causes of action i.e. it
is necessary to identify fixed cost, steps cost directly attributable cost.
4.
It
provides a budgeting planning tool for management. This responds to changing in
business environment, obsolete items of expenditure are identified and cease.
5.
The
documentation enables coordinated in-depth knowledge of an organization
operation to be available to all management.
6.
In
summary, zero base budgeting should result in a more efficient allocation of
resources to activities and department of the organization.
DISADVANTAGES
1.
The
major disadvantage of zero base budgeting area as follows
2. The volume or extra paper work created
by the decision packages is much
3. The
assumption of about cost and benefit in each package must be continual updated, and new packages develop as soon as new activity emerges.
4. ZBB
might also emphasis short term benefit to the detriment of long term benefit.
5. It
might encourage the false idea that a decision has to be made in the budget.
6. Government
must be able to meet unforeseen opportunity and treat at all time, and must not
feel restricted from carrying out new ideas simply because they were not
approved by a decision package cost benefit and ranking analysis.
7. The time to implement and maintain ZBB
may outweigh the benefits.
8. The ranking of simple dissimilar
activity is difficult.
There may be lack of commitment on
the part of lower government staff which may dilute the effectiveness of the
system.
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