IGNOU : M.COM : MCO 5 : UNIT 10 : Q - 2. What do you understand by zero base budgeting ? How is it different from traditional budgeting?

Ans. ZERO BASED BUDGETING (ZBB)

The technique of zero based budgeting suggests that an organisation should not only make decisions about the proposed new programmes but it should also, from time to time, review the appropriateness of the existing programmes. Such review should particularly done of such responsibility centres where there is relatively high proportion of discretionary costs.

Zero based budgeting, as the term suggests, examines a programme or function or responsibility from “ scratch.” The reviewer proceeds on the assumption that nothing is to be allowed. The manger proposing the activity has, therefore, to prove that the activity is essential and the various amounts asked for are reasonable taking into account the volume of activity. Nothing is allowed simply because it was being done or allowed in the past. Thus, it means writing on a clean slate.

Peter A. Pyhrr defined the zero based budgeting as “an operating planning and budgeting process which requires each manager to justify his entire budget requests in detail from scratch (hence zero basis). Each manager states why he should spend any money at all. This approach requires that all activities be identified as decision packages which would be evaluated by systematic analysis ranked in order of importance.

Thus, a cost-benefit analysis is done in respect of every function or process. It has to be justified while framing budgets. The assumption underlying zero base budgeting is that the budget for the previous period was zero, therefore whatever costs are likely to be incurred or spending programmes are chalked out, justification or the full amount is to be given. Under conventional system of budgeting, however, the justification is to be submitted by the manager only in respect of the increase in the demand for allotment of funds in excess over the budget for the previous period. Thus, instead of functionally-oriented spending approach, programme-oriented and decision-oriented approach is followed under zero based budgeting.