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Zero based budgeting

Zero-Base Budgeting

Steps involved in the introduction of Zero-base budgeting

1. Corporate objectives should be established and laid down in detail.
2. Decision units should be identified by dividing the organization according to functions, operations or activities for detailed analysis.
3. An analysis and documentation of each decision unit should be done by a responsible manager keeping the following points in view:
a. Current operations of decision units should be identified and li ked with organizational objectives.
b. Alternatives to meet the target should be expressed.
c. Best alternative should be selected and effects that are required to accomplish the alternative should be documented.
4. ‘Decision units’ should be split into decision packages ranked in order of priority.
5. Budget staff will compile operating expenses for packages approved by departmental heads.

 

The preceding discussions will reveal that zero-base budgeting is primarily based on:

1. Development of decision units – An organization is divided among decision units. The manager of decision unit justifies the relative budget proposals. Any of the bases may be adopted for dividing the organization among the decision units.
(a) Products (b) Markets (c) customer groups (d) geographical territories, and (e) Capital projects.
The division of organization among its decision units should be logically linked with organizational objectives.

 

2. Identification of decision packages – Each manager should break down his decision unit into smaller decision packages. Top management lay down the minimum organizational level for developing decision packages. A decision package has been defined as a document that distinctly identifies a function, operation or an activity. A decision package will be evolved with reference to particular circumstances. A decision package should have the following elements:
a. Basic identification of data like program number, date and brief description of program goal.
b. Feasibility assessment like economic benefits of attempting the program and risk involved in discarding the program.
c. A decision unit may also specify intangible benefits like benefits, which can’t be identified.

 

3. Ranking of decision packages – By ranking the decision packages a company will be able to weed out a lot of marginal efforts. The scare resources of an organization should be directed to most promising lines only. Ranking implies determining the priorities among the available decision packages. Ranking of decision packages is an important exercise and should be attempted only by those who have required knowledge and experience. Initial ranking can be conducted by sectional managers and it can afterwards be reviewed by a committee including departmental heads. A decision packages is ranked keeping the following points in view:
a. Necessity of introducing programs.
b. Technical competence of company for attempting the programs.
c. Economic benefit analysis relating to programs.
d. Operating feasibility of introducing programs.
e. Study of risk involved in abandoning the program.

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