Zero Based Budgeting

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Description of Zero Based Budgeting. Explanation.




Definition Zero Based Budgeting. Description.

Zero Based Budgeting is a technique that sets all budgets to nil at the beginning of the year or period and requires from the departments that they justify all of their expenditures, not just those exceeding the budget. Money is allocated to the departments based on merit and not based on the previous year budget plus or minus some percentage such as in many traditional budgeting systems.

Its aim is to achieve is an optimal allocation of resources that incremental and other budgeting systems cannot achieve. Managers are asked to identify and justify their areas of work in terms of decision packages prior to starting the work.

Zero-Base-Budgeting was pioneered in the early 60s at Texas Instruments by Peter Phyrr.

Advantages of Zero Based Budgeting

  • The budget process focuses on a comprehensive analysis of objectives and needs.

  • Planning and budgeting are combined into a single process.

  • Managers must evaluate the cost effectiveness of their operations in detail.

  • Cost awareness and management participation in planning and budgeting is expanded at all levels of the organization.

Criticisms and drawbacks of Zero Based Budgeting

  • The huge amount of work involved.

  • May lead to micro management, offering less time and energy for the things that really matter.

  • Does it really lead to a material shift in the use of resources?

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Compare with: Beyond Budgeting  |  Balanced Scorecard  |  Activity Based Costing

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