Page 139 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 7.2.1 Differences between Traditional Budgeting and Zero-based
Budgeting

The differences between the two are as under:

Table 7.1: Difference between Traditional Budgeting and Zero-based Budgeting

Traditional Budgeting Zero-Based Budgeting
Emphasis Lays emphasis on ‘How much' Lays emphasis on ‘Why'
Focus Focus is on increase or decrease in Focus is on ‘cost benefit analysis'.
expenditure.
Communication Communication is, usually, vertical. Communication is, usually, both
vertical and horizontal.
Approach Past is taken for granted and never Past is questioned and justification
questioned for continuation. needed for continuation and fund
allocation.

Note Zero-based Budgeting can be applied successfully in State Government spending.

Self Assessment

State whether the following statements are true or false:

3. Zero-Based Budgeting is the latest technique of budgeting.
4. In Zero-Based Budgeting, the focus of management is on analysis and decision-making.
5. There is no difference between the conventional budgeting and Zero-Based Budgeting.
6. In Zero-Based Budgeting, zero is taken as base.

7.3 Steps for Preparation of Zero-based Budgeting

The following steps are involved in Zero-Based Budgeting:
 Determining the Objectives: Determination of the objectives is the first step. The objective
can be cost reduction in staff overheads or dropping those projects that do not fit in the
organisational objectives or focus.
 Extent of Coverage: It relates to the decision whether Zero-Based Budgeting is to be
introduced in all areas or certain select areas on trail basis.

 Developing Decision Units: Decision Unit can be a functional department, a programme, a
product-line or sub-line. Each decision unit must be independent. Then only, they come
under consideration. Cost benefit analysis is to be done to the decision units. Decision is
to be taken, whether the units are to be continued or dropped. If the cost benefit analysis
is favourable, the decision unit can be implemented, otherwise can be dropped.

!

Caution Benefit should be more compared to the cost. Cost benefit analysis is the foundation
of ZBB, which helps in ranking the projects. If the decision unit is dropped, no further
thinking is needed about those activities.

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