Page 142 - DCOM206_COST_ACCOUNTING_II

Unit 7: Zero-based Budgeting

Self Assessment Notes

State whether the following statements are true or false:
11. Zero-Based Budgeting overcomes the weaknesses of government budgets.
12. Zero-Based Budgeting is ideal for implementation in non-manufacturing areas/
Government budgets.

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Caselet Zero-Based Budgeting: The Indian Scene

ero-based budgeting has been adopted by departments of the Central Government
from 1st April, 1987. This is intended to help in the judicious allocation of scarce
Znational resources and in deriving optimum benefits out of the resources allocated.
It will be applied to ongoing programmes as well as new programmes, developmental
programmes as well as non-developmental programmes.

A circular dated 10th July, 1986, issued by the Secretary, Ministry of Finance, Government
of India, calls upon the public sector undertakings to use Zero-based budgeting for revenue
budgets initially, as for the capital budgets, there is already an elaborate system of
evaluation at various levels.

The rationale for subjecting public expenditure to Zero-based budgeting is convincing in
view of the resource constraint for implementing the Seventh five year plan. Some measures
may also be taken to ensure that like public sector enterprises, it is also extended to
private sector enterprises.
Source: Cost Accounting Theory And Practice 12th ed. by Bhabatosh Banerjee

7.5 Summary

 Budgets are zero unless managers make the case for resources-the relevant manager must
justify the whole of the budget allocation.
 It means that each activity is questioned as if it were new before any resources are allocated
to it.
 Each plan of action has to be justified in terms of total cost involved and total benefit to
accrue, with no reference to past activities.

 Zero-based budgets are designed to prevent budgets creeping up each year with inflation.
 In Zero-based budgeting, justification of expenditure is to be made for the past as well as
new projects.

 ZBB allows top-level strategic goals to be implemented into the budgeting process by
tying them to specific functional areas of the organisation, where costs can be first grouped,
then measured against previous results and current expectations.

 Zero-based budgeting may require an extensive amount of time, money, and paper work;
but it does provide a systematic method of addressing an organisation’s financial concerns,
in turn enabling an organisation to better allocate its resources.

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