Page 150 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 7: Budgeting

Self Assessment Notes

Fill in the blanks:

14. Budget is a statement of …………………
15. ………………… contains two different processes one is the preparation of the budget and
another one is the control of the prepared budget.
16. Budget is an estimate prepared for definite ........................ period.

17. Budgetary control facilitates centralised control with ………………… authority and
responsibility.
18. The budget is usually expressed in terms of …………………

7.7 Zero-base Budgeting (ZBB)

Zero-base budgeting is one of the renowned managerial tools, developed in the year 1962 in
America by the Former President Jimmy Carter. The name suggests, it is commencing from
the scratch, which never incorporates the methodology of the other types of budgeting in
determining the estimates. The Zero base budgeting considers the current year as a new year
for the preparation of the budget but the yester period is not considered for consideration. The
future activities are forecasted through the zero base budgeting in accordance with the future
activities.

Peter A Pyher “A planning and budgeting process which requires each manager to justify his
entire budget request in detail from scratch (Hence zero base) and shifts the burden of proof
to each manger to justify why he should spend money at all. The approach requires that all
activities be analysed in “decision packages” which are evaluated by systematic analysis and
ranked in order of importance.”
This type of budgeting requires the manager to reason out the aim of spending, but in the case
of traditional budgeting is unlike, which are never emphasize the reasons of spending in terms
of expenses.
Table 7.2: Traditional Budgeting vs. Zero Base Budgeting

Basis of Difference Traditional Budgeting Zero-base Budgeting
Emphasis It is accounting oriented; emphasis It is more decision oriented;
on “How Much” emphasis on “Why”
Approach It is monitoring towards the It is towards the achievement of
expenditures objectives
Focus To study the changes in the To study the cost benefi t analysis
expenditures
Communication It operates only Vertical It operates in both directions
communication horizontally and vertically
Method It is based on the extrapolation Its decision package is totally based
i.e from the yester fi gures future on the cost benefi t analysis.
projections are carried out

7.7.1 Steps involved Zero-base Budgeting

1. The very first step is to prepare the Zero-base Budgeting is to enlist the objectives.

2. The extent of application should be decided in the next phase of the ZBB.

LOVELY PROFESSIONAL UNIVERSITY 145