Page 159 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 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.

Note Traditional Budgeting vs. Zero-base Budgeting
Basis of Difference Traditional Budgeting Zero-base Budgeting
Emphasis It is accounting oriented; emphasis on It is more decision oriented;
“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 i.e from Its decision package is totally
the yester figures future projections are based on the cost benefi t analysis.

carried out
8.5.1 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.
3. The next important stage is to prioritize the activities.

4. The Most important step involved in the process of ABB is cost benefi t analysis.

5. The final step is to select, approve the decision packages and finalise the budget.

8.5.2 Benefits of Zero-base Budgeting

1. It acts as guide for the management to allocate the resources more accurately depends
upon the priority for an effective implementation.

2. It enhances capability of the managers who prepares the budget for future action.
3. It paves way for optimum utilization of resources available.
4. It is a technique of utilitarian of the resources with reference to the activity involved.
5. It is dome shaped only towards the achievement of organizational goals.

8.5.3 Criticism of Zero-based Budgeting

1. Non-financial matters cannot be considered for the cost and benefi t analysis.

2. Difficulties involved in the process of ranking of the decision packages.

3. It needs more time span for preparation and cost of operations is more and more.

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