Page 140 - DCOM206_COST_ACCOUNTING_II

Unit 7: Zero-based Budgeting

 Developing Decision Packages: This is the most important step involved in the ZBB process. Notes
After decision for selection of the units, the concerned manager of the activity is given the
freedom to come out with the alternatives to achieve. He does the cost-benefit analysis
and selects the best course of alternative. He summarises the plans and resources required
to achieve.
 Preparation of Budgets: This is the last stage involved in ZBB process. Once the top
management has ranked the various decision packages keeping in view of the cost benefit
analysis and availability of funds, a cut-off point is established. All packages (programs,
products, etc), which come within the cut-off point are accepted and others rejected. The
resources are then allocated to the different decision units and budgets relating to units
are approved.

Did u know? Zero-based Budgeting is an extension of the cost benefit analysis method to
the area of corporate budgeting.

Task Justify Zero-Based Budgeting is superior to conventional budgeting.

Self Assessment

State whether the following statements are true or false:
7. Zero-Based Budgeting allows the continuation of ongoing projects, without any review
and justification.

8. Non-manufacturing areas are suitable for implementation of Zero-Based Budgeting.
9. Cost benefit analysis is the foundation for Zero-Based Budgeting.
10. Zero-Based Budgeting cannot be applied in Government departmental budgets.

7.4 Advantages and Limitations of Zero-based Budgeting

ZBB is a revolutionary concept. The advantages are as under:
 Proper Allocation of Funds: Funds are scarce. Priority in allocation of funds is made on
cost-benefit analysis.

 Systematic Evaluation: Manager has to justify the demand for resources, every year. So,
it provides the organisation a systematic way to evaluate different programmes and
operations undertaken. So, for the ongoing projects too, review is made, every year.
Funds allocation for the ongoing projects is made, if there is justification to continue,
further.
 In other words, there is no difference between the new projects and ongoing projects from
the view-point of allocation of funds.

 Links Budgets with Goals of Enterprise: Those projects that do not fit within the overall
goals of the enterprise are not continued, even if they were commenced. Goal oriented
approach of the enterprise would be developed.

 Zero-based Approach: Zero is taken as the base, every time. Only those activities and
programmes that are essential are undertaken, which improves the overall efficiency of

LOVELY PROFESSIONAL UNIVERSITY 135