Concept of Zero-Based Budgeting (ZBB):
In the most literal sense, Zero-Based Budgeting implies constructing a budget, without any reference to what has gone in previous year or period, based on a fundamental re-appraisal of purposes, methods and resources. Prof. R.A. Musgrave defines it, “as a term suggests the idea is to consider the budget as a whole rather than to examine incremental change only.
In the words of peter A. Phyrr, “A planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence Zero base) and shifts the burden of to each manager to justify why he should spend money at all for a particular activity under his charge. For example, the health department may prepare a budget for controlling epidemics like plague, cholera. Under the ZBB approach, the question that would be asked is: What if the Polio Eradication Programme is not funded? ZBB approach will insist on made concrete answer in quantitative terms, like the increase in medical bills of the guardians Of Polio patients, increase in disformities of young children. Thus, the social costs of incurring expenditure on polio eradication are compared with social benefits. This implies that each department has to justify its existence and continuance on the basis of cost-benefit analysis. The approach requires that all activities be analysed in decision packages’ which are evaluated by Systems Analysis and ranked in order of importance.”
Thus, each department is required to justify its budget requests from the bottom up, evaluating alternative programmes, so as to select the best alternative and allocate resources accordingly. Thus, no consideration is given to the past or existing present, any programme may be included or excluded. The budget is considered as a whole and afresh, i.e., from
Features of Zero-Based Budgeting: The basic features ofZBB are the following:
(i) Examination of programmes at various levels of resource allocation
(ii) Objectives to be formulated for each agency.
(iii) Activities of each agency to be converted into decision packages
showing performance at various resource levels such as minimum
intermediate, current and enhancement levels; and
(iv),Decision package to be evaluated and arranged at each level d
management in ranking order which enables the agencies to define the
minimum effort above the minimum for each programme.
Objectives of Zero Based Budgeting
However, Zero-Base Budgeting been advocated on the grounds of
(i) making clear cut analysis Of priorities, objectives and needs of the economy ; (ii) Provides an objective basis to eliminate programmes which outdated their utility ; (iii) Provides better management information have about the working and ranking of the budget ; (iv) helps in identifying the trade-off between and within the programmes ; (v) develops an atmosphere of cost-consciousness and profit mindedness of projects ; (vi) makes the budget exercise more rational and systematic and less political and arbitrary ; (vii) eliminates the outlived programmes,
Distinction between Conventional Budget and
Zero Base Budgeting
The zero-base method of budgeting differs from conventional budget-making in the sense that in ZBB a manager is required not only to justify the new proposals but also needs to justify the ongoing operations or activities and the funds for them. In conventional or current budget generally no reappraisal of ongoing activities is undertaken when the budget is prepared whereas in ZBB appropriations for the existing programmes and activities also required to be justified in each year’s budget rather than adding them in the budget as a matter of routine.
Advantages of Zero-Base Budgeting: A number of benefits arrive of ZBB
(i) It helps management to have a more effective allocation of resources due to the identification, evaluation and justification of all activities.
(ii) Reallocating resources and shifting grants among organisational units by the top management becomes possible with greater flexibility.
(iii) It enables management to avoid duplication of effort in different organisational units either by eliminating certain functions •or centralising the same.
(iv) Zero-base budgeting strengthens the database and evaluation process from which all documents related to the budget plans are drawn. Even if it leads to the elimination of some procedures, there is no loss of control.
(v) It is useful in attaining the organisational goals. Budgeting 1st-elated
to the organisational goals. It would not allow the suggestion done in the past. Only those things will be allowed which help in realising organisational goals.
(vi) It requires each budget request to be justified.
Limitations of Zero-Base Budgeting: following problems have been noticed for an effective adoption of ZBB:
(i) Difficulty in evaluating different or dissimilar the scale.
(ii) More time and effort is required.
(iii) Difficulty in ranking a large numbér Of decision packages.
(iv) Increased administrative and communication efforts.
(v) Managers threatened by ZBB.
(vi) Cost/performance information required may not be available or may be difficult to obtain.
(vii) ZBB can hardly make any contribution to contain transfer payments to other levels of government and household.
Thus, it is not for all shortcomings of the traditional budgeting. We may conclude with the observation made by Prof. Musgrave that “it is a helpful procedure but clearly impracticable in detailed application. A more realistic approach would be to apply the Zero-base Method to a particular department or programme on a rotating basis. “