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Unit 7: Zero-based Budgeting

this system is the Florida Power and Light Company. In 1977 zero-based budgeting became Notes
required for all Florida Power and Light general office staff departments. Ben Dady, the company’s
director of management control, favoured the system because when managers develop the
zero-based budget, they begin with nothing in terms of budgeted dollars, and have to justify or
prove why they need to spend money on each activity or project for all the dollars they expect
to spend. New and old problems are treated equally. Every managerial activity is properly
identified and then evaluated by analysing more efficient ways and alternative levels of
performing the same activity. These alternatives are then ranked and relative priorities are
established.
The publicity in the 1970s surrounding zero-based budgeting gave the impression that the
system was a relatively new technique, although the system was not new at all. Zero-based
budgeting is quite similar to the Planning-Programming-Budgeting system, implemented in
the 1960s. Both systems involve evaluating the inputs and outputs for specific activities, as
opposed to the traditional line-item format.

Self Assessment

Fill in the blanks:
1. In the 1960s, the …………………… was adopted by President Lyndon B. Johnson to be
implemented throughout the federal government.
2. …………………… used budgeting to establish standard costs and to estimate future expected
costs in a budgetary form.
7.2 Meaning of Zero-based Budgeting

Zero-based Budgeting is the latest technique of budgeting. A budget is a representation of
quantification of the firm’s objectives. An accurate budget can be framed, when a relationship
between the inputs and outputs can be established. In all the activities, such relationship cannot
be established. In such areas, it is difficult to develop standard costs. Where it is difficult to
compare the resources allocation with the output, ZBB is more appropriate in controlling.
The term ‘Zero-based Budgeting’ means starting from the scratch.
In Zero-based budgeting, justification of expenditure is to be made for the past as well as new
projects. In the traditional budgeting, the figures of the previous years are taken as base and
additions are made for the current year. But, in Zero-based Budgeting, even the running projects
are to be justified for continuation. If the past projects were allowed to continue, without
justification, the past inefficiencies would continue, automatically. So, the manager has to justify,
why he wants to continue to spend.

Note In ZBB, the manager has to justify the essentiality of the new projects for their
starting and continuation of previous projects, every year. Equally, the concerned manager
has to justify the amount of spending, thereon, is reasonable.

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