zerobasedbudgeting.doc

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22 Apr 2012
Department
Course
Z e r o B a s e d B u d g e t i n g ( Z B B )
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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