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Unit 7: Zero-based Budgeting
Pooja, Lovely Professional University

Unit 7: Zero-based Budgeting Notes

CONTENTS
Objectives
Introduction

7.1 History of Zero-based Budgeting
7.2 Meaning of Zero-based Budgeting
7.2.1 Differences between Traditional Budgeting and Zero-based Budgeting

7.3 Steps for Preparation of Zero-based Budgeting
7.4 Advantages and Limitations of Zero-based Budgeting
7.5 Summary
7.6 Keywords
7.7 Review Questions

7.8 Further Readings

Objectives

After studying this unit, you will be able to:
 Discuss the history of zero-based budgeting;
 Explain the meaning of zero-based budgeting;

 Discuss the advantages and disadvantages of zero-based budgeting;
 Describe the steps involved in the preparation of zero-based budgeting.

Introduction

In budgeting technique when the whole budget, from the beginning, is based on zero, it is called
the ‘Zero-based budgeting’. That is to say, the zero-based budget is that which is prepared
without taking into account of the events related to the past budgeted activities including those
expenses which are vital or unavoidable. It is based on the premise that the budget for a future
period is to show scratch so long demand for any activity is not justified for basic convertible
currency of a country. This is nicely corroborated by the definition of Charles T. Horgren. He
defines Zero-based budgeting, “As an elaborate practice of having a manager justify activities
from the ground up as though they were being launched for the first time.” The principle behind
this is not to allow any expenditure unless they are justified for the purpose. In case of the
application of Zero-based budget, a manager is supposed to justify his requirements of funds by
analysing the outcome of the activity he proposes to undertake. Therefore, a manager is to carry
out “Cost-benefit analysis” of the activity under his control and will be responsible for the
accomplishment of the same.
In brief, each item in the budget is considered as non-existent at the time of budget planning and
has to be justified a new at all times of preparing a budget under Zero-based budgeting technique.
The purpose is to cut down expenses and to find out updated solutions to the various problems
to be faced in course of carrying out the proposed activity.

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