Page 141 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes the enterprise. Alternative courses of action are always studied. Economies are achieved,
eliminating wastage. The focus of the management is on analysis and decision-making

 Optimum use of Resources: As cost-benefit analysis is the guiding principle in fixing
priorities, resources are used to the optimum advantage of the organisation.
 No Incremental Approach: Normally, budgets are based on incremental approach. The
usual feature of functional heads is to seek information from the accounts department for
the previous year’s expenditure, add ‘something’ for the current year and try to justify the
increase. This incremental approach is not possible with Zero-Based Budgeting. Manager
has to justify their activities and the funds requested.

 Most Appropriate for Non-Manufacturing Areas: Zero-Based Budgeting is very appropriate
for the staff and support areas (Non-Manufacturing Areas). In these areas, the output of
these areas is not, directly, related with the final output of the organisation.

Within the business world, ZBB can be applied to research and development, data processing,
quality control, marketing and transportation, legal staff and personnel office.

Example: A separate training department may remain in an organisation. The utility of
the continuation of the department may be studied, in comparison to conducting training outside
the organisation. Training is a non-manufacturing area and its discontinuation within the
organisation and providing diverse types of training to staff, outside the firm, may be more
ideally suitable, while reducing the costs to the enterprise.

Limitations of Zero-based Budgeting

The main downside of zero-based budgeting is the exceptionally high level of effort required to
investigate and document department activities; this is a difficult task even once a year, which
causes some entities to only use the procedure once every few years, or when there are significant
changes within the organisation. Another alternative is to require the use of zero-based budgeting
on a rolling basis through different parts of a company over several years, so that management
can deal with fewer such reviews per year. Other drawbacks are:

 Bureaucracy: Creating a zero-based budget from the ground up on a continuing basis calls
for an enormous amount of analysis, meetings, and reports, all of which requires additional
staff to manage the process.
 Gamesmanship: Some managers may attempt to skew their budget reports to concentrate
expenditures under the most vital activities, thereby ensuring that their budgets will not
be reduced.
 Intangible justifications: It can be difficult to determine or justify expenditure levels for
areas of a business that do not produce “concrete,” tangible results. For example, what is
the correct amount of marketing expense, and how much should be invested in research
and development activities?
 Managerial time: The operational review mandated by zero-based budgeting requires a
significant amount of management time.

 Training: Managers require significant training in the zero-based budgeting process, which
further increases the time required each year.

 Update speed: The extra effort required to create a zero-based budget makes it even less
likely that the management team will revise the budget on a continuous basis to make it
more relevant to the competitive situation.

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