Zero Based Budgeting (ZBB)
Zero based budget
• Start each budget period afresh-not based on historical data
• 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
Advantages of ZBB
• Forces budget setters to examine every item.
• Allocation of resources linked to results and needs.
• Develops a questioning attitude.
• Wastage and budget slack should be eliminated.
• Prevents creeping budgets based on previous year’s figures with an added on percentage.
• Encourages managers to look for alternatives.
Disadvantages of ZBB
• It a complex time consuming process
• Short term benefits may be emphasised to the detriment of long term planning
• Affected by internal politics - can result in annual conflicts over budget allocation
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