Question 2 (d)

Zero-base budgeting: meaning, comparison with traditional budgeting, and advantages

6 marks

Time to write: About 12 minutes
Topic: Budgeting and budgetary control

Question

Question 2 (d) · 6 marks

What is your understanding of Zero base budgeting ? In what way is it different from Traditional Budgeting? Write some advantages of ZBB in brief?

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

What…?Write…?3 asks, each with its own marks below. Answer all 3.
in briefShort headed points, no long paragraphs.

Write it in this order

Read; underline the asks; jot your points 1 min
1 Meaning of ZBB 2 marks 2 min
2 Difference from traditional budgeting 2 marks 4 min
3 Advantages 2 marks 4 min
Check: every ask answered, key terms underlined 1 min

123

Easy marks

Meaning of ZBB (step 1, 2 marks): a clear definition and a line on what it covers. It opens the answer, so it takes a minute or two.

Short on time? Keep step 1 short. Trim steps 2 and 3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Meaning of zero-base budgeting

Zero-base budgeting (ZBB) is a method of budgeting in which every activity and every item of expenditure must be justified afresh, from zero, each time a budget is prepared, as though the activity were being started for the first time. Nothing is allowed merely because it was spent last year. Each activity is described in a decision package (its purpose, costs, benefits and alternatives); the packages are ranked by their importance to the organisation's goals; and funds are allocated in order of rank until the available resources are used up. The method is associated with Peter Pyhrr of Texas Instruments, and it is best suited to service departments and public spending, where outputs are hard to tie to costs.

Zero-base and traditional budgeting compared

Basis	Traditional (incremental) budgeting	Zero-base budgeting
Starting point	Last year's figures	Zero
Approach	Adds or subtracts an increment for inflation or change	Every activity justified afresh
Focus	Money: how much to add	Activities and their cost-benefit
Existing activities	Continued automatically	Questioned; may be cut or dropped
Effort and time	Less	Much more
Responsibility for justification	On those proposing increases	On every manager, for the whole budget

Advantages of ZBB

Removes waste and obsolete activities, since nothing continues without justification.
Allocates resources to the activities with the highest priority and benefit.
Makes managers think critically about cost-effective alternatives.
Improves planning and links spending with objectives.
Involves managers at all levels, improving communication and commitment.
Is especially useful where output is hard to measure, such as service departments.

ZBB also has limitations: it takes much time and paperwork, ranking packages can be subjective, and managers may resist it; many organisations therefore apply it periodically or to selected departments only. It is most valuable where spending is largely discretionary. Its real value lies in making every manager defend each rupee of the budget afresh.

Where the 6 marks sit

#	Component	Marks
1	Meaning of ZBB	2
2	Difference from traditional budgeting	2
3	Advantages	2
	Total	6

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