In this article, we will learn in detail about “Zero Based Budget” including its definition, origin, application, benefits, limitations, differences, and much more.
What is a Zero-Based Budget?
In a zero-based budget, the past budget is not taken as a basis but zero as a basis. That is, a budget that is formulated on the basis of zero rather than on the basis of past information is called a zero-based budget.
One problem with the historical or conventional budgeting system is that there is no correlation between the amount allocated for the expenditure and the potential benefit from the expenditure.
However, in a zero-based budgeting system, it is considered reasonable to allocate a certain amount of money for potential benefits every time the budget is prepared.
Origin of Zero Based Budget
The concept of a zero-based budget system is thought to have been first introduced in 1924.
The United States Department of Agriculture adopted a zero-based budget in 1960 and later that year.
Mr. Peter A Pyhrr, a manager at Texas Instruments Corporation in Texas, USA, successfully implemented a zero-based budget in 1969-70.
Georgia Governor Jimmy Carter recognized the zero-budget system in 1972, and as President of the United States in 1977, he implemented a zero-based budget for the federal government.
Since then, various universities in the United States, as well as government and non-government organizations in the city, have adopted a zero-based budgeting approach.
Currently, countries such as Korea, Canada, Japan, Australia, and others use zero-based budgeting extensively.
Field of Application of Zero Based Budget
The following are some of the areas where a zero-based budget applies:
- When there is a lot of discretionary costs, a zero-based budget is a great way to keep track of it.
- A zero-based budget is used in the case of a newly established organization or the production of a new product where there is no previous information.
- In cases where the level of production or the amount of production is not specified, a zero-based budget is especially useful.
- For service activities, using a zero-based budget is beneficial.
- A zero-based budget is reasonable when planning and control are direct.
- Zero-based budgeting can be implemented successfully for all government expenditures and functions.
Benefits or Advantages of Zero-Based Budget
The advantages of a zero-based budget are mentioned below:
- Proper evaluation of the zero-based budget process can lead to better and more profitable projects and avoid unnecessary and less important projects.
- Every action plan will be logical in this method.
- In this method, the components are used efficiently and the project is evaluated through cost opportunity analysis. However, it is possible to reduce costs and control costs.
- In a zero-based budget system, the best is chosen after a thorough evaluation of various alternative projects.
- In this method, the expenditure opportunity is analyzed before the distribution of wealth, so it is known how much profit or benefit can be obtained from the amount of wealth. Distribution is done on the basis of need, importance, and benefits, so a fair and desirable distribution of resources is possible.
- Many of the difficulties, limitations, and weaknesses of the conventional budget can be overcome through a zero-based budget.
- This method facilitates smooth communication and coordination as it contains the details of the decision package.
- This method enhances the spontaneous participation of officers and employees at all levels and surveys the performance process to enhance the skills of officers and employees.
Limitations or Disadvantages of Zero-Based Budget
The limitations or disadvantages of a zero-based budget are mentioned below:
- Due to project evaluation, alternative procedures, decision making, rationality, and other factors, zero-based budgeting takes a long time.
- The zero-based budgeting system is both time-consuming and costly. As a result, small-scale industries will be unable to use this method.
- In organizations that do not have voluntary expenditure, this method is ineffective. Furthermore, while there are some short-term benefits, long-term planning is inconvenient.
- In this method, the budget is created from scratch. As a result, it is not possible to measure the actual results or analyze the comparative judgment.
Which Points are to be Considered for the Preparation of a Zero-Based Budget?
The followings points should be considered for the preparation of a zero-based budget:
- Whether the currently proposed action process is reasonable.
- Whether it will be possible to perform the proposed work process efficiently and effectively and if so how efficiently and effectively it will be possible.
- Whether reasonable benefits can be obtained from the money allocated in the proposed work process.
- Whether costs should be allocated for a new operation by shutting down or reducing the proposed operation
Difference between Traditional Budget and Zero-Based Budget
The difference between a traditional budget and a zero-based budget is as follows:
|Sl. No.||Point of Difference||Traditional Budget||Zero-Based Budget|
|1.||Definition||A budget that is prepared on the basis of past information is called a conventional budget.||A budget based on zero is called a zero-based budget.|
|2.||Base||The basis of the traditional budget is past information or historical information of the organization, not an argument.||The key consideration is whether the potential benefits are reasonable with a zero-budget allocation based on a zero-budget.|
|3.||Concept||The concept of a traditional budgeting system is very old and this budget is formulated according to the long tradition.||The concept of a zero-based budget system is modern, well thought out, and rational.|
|4.||Field of Application||Since the traditional budget system is ancient, the application of this method is more common in government, private and autonomous organizations.||Although the zero-based budget system is modern, it is more applicable to discretionary expenditure, especially in government development plans.|
|5.||Steps in Preparation of Budget||In this method, it is not necessary to analyze the effectiveness, cost, requirements, opportunities, etc. of the proposed work process in preparing the budget.||In this method, it is necessary to analyze the steps like efficiency, expenditure, requirements, opportunities, etc. in the proposed work process in preparing the budget.|
|6.||Allocation of Expenditure||In the case of traditional budgets, the highest level of directors allocates expenditure in a traditional manner.||In a zero-based budget, the excess of the responsibility center or the expenditure center rationally allocates the expenditure.|
|7.||Responsibility Control||Traditional budgets do not allocate responsibilities properly. As a result, there is no responsibility center.||In a zero-based budget, specific responsibilities are allocated so that there is a center of responsibility.|
|8.||Reduction of Expenditure||It seems unnecessary in the traditional budget system, but it is often not possible to reduce expenditure.||Zero-based budgeting makes it possible to logically eliminate unnecessary spending.|
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