Page 137 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 7.1 History of Zero-Based Budgeting

Government budgeting was established in Great Britain in the late 17th century. The enactment
of the 1689 Bill of Rights gave taxing authority to Parliament as opposed to the King. Parliament
gradually established spending programs and by the 1820s published detailed annual financial
statements showing revenues and expenditures and a projected surplus or deficit. The usage of
budgets by the United States government did not begin until 1800 when a law was passed for the
Secretary of the Treasury to submit an annual financial report to Congress. This action was not
taken by the Treasury department, and instead, federal government agencies developed their
own reports and submitted them to the Treasury.
Several attempts were made in the early 1900s to implement federal budgeting and financial
management, but each failed, even though 44 individual states had already passed laws
concerning budgets. Congress passed the Budgeting and Accounting Act in 1921 along with the
creation of a centralised Bureau of the Budget. Although created in 1921, it was not until the mid-
1940s that the federal budget included identification of the major goals and program objectives,
a systematic analysis of supplies and needs for both military and civilian purposes, and a long-
range plan of projects.

Did u know? In the 1960s, the Planning-Programming-Budgeting System (PPBS) was
adopted by President Lyndon B. Johnson to be implemented throughout the federal
government.
The PPBS was short-lived, however. In the 1970s, every federal department except for the Defense
Department abandoned the system. The concept of zero-based budgeting gained notoriety in
1977 when President Jimmy Carter announced he was introducing zero-based budgeting into
the federal budgeting process. The term, “zero-based budgeting,” and the techniques for carrying
out these budgeting processes had been previously introduced in an article written by Peter A.
Pyhrr in the Harvard Business Review in 1970, but former President Carter adopted this method
at the federal level, zero-based budgeting began to spread more rapidly.
President Carter, while still governor of Georgia in 1973, contracted with Pyhrr to implement
the system for the entire executive budget recommendations for the state of Georgia. However,
when the system was applied to governmental budgeting, it failed due to the great amount of
effort and time required development and implementation. With further refinement, however,
zero-based budgeting was largely hailed as a success when introduced to Congress in 1977.
Early business budgets focused on controlling costs and little emphasis on measuring effectiveness.
In the early 1900s, the use of budgets increased due to the necessity for industries to implement
more careful factory planning. A systematic plan of budgeting arose from two areas: industrial
engineering and cost accounting. Scientific methods were used by industrial engineers to arrive
at production standards, which could then be used to estimate future operations and performance
standards. Cost accountants used budgeting to establish standard costs and to estimate future
expected costs in a budgetary form. Also at this time, texts on budgeting and managerial
accounting began to emerge.
As zero-based budgeting gained traction in the 1970s among public budgeting constituents, it
also gained popularity among private enterprises, and during this time a number of organisations
modified and implemented the system. An example of an organisation successfully implementing

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