What the zero based budgeting (ZBB)?

Typically many organizations follow incremental budgeting - which takes last year's expenses as the base, and assigns suitable increment/decrement on that to arrive at new year's budget. It is good to the extent it does not get misused by departments who are eager to spend all the allocated budget so that next year base is maintained well. 

 

In contrast, Zero based budgeting, considers base as zero - it does not takes into account earlier expenses - this way organization is forced to really think on its priorities and doables. The budget thus allocated is purely done based on real requirements. That said, it takes much more time and justifications to finalize budget this way. 

Zero based budgeting is a budgeting technique where all conponents are analyses and justified for each new period. Base of this budgeting is considered as zero and every functions in the organization is reviewed and analysed for its requirements and costs. Activity prioritizing is an important aspect in this budgeting process and costs are accumulated for what is needed for period irrespective of its variance from previous periods.

The zero-based budgeting is a method of budgeting whereby all the expenses for the new period are calculated on the basis of actual expenses that are to be incurred and not on the incremental basis which involves just increasing the expenses incurred in the previous year at some fixed rate. Under this method, every activity needs to be justified, explaining the revenue that every cost will generate for the company.

The advantages are

1. More Accurate

2. Efficient allocation of resources

3. Reduction in redundant activities

4. Incremental budgeting system of inflation is not allowed

5. Improved Coordination and Communication

Disadvantages

1. ZBB is Time-Consuming.

2.  High Manpower Requirement

3. Difficult exercise due to Lack of Expertise

Zero-Based Budgeting - ZBB

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.

The most important characteristics : Instead of blindly increasing the budget by a certain percentage and masking the cost increase, the company has identified a situation in which it can either make the part or buy the part for its end products. With traditional budgeting, cost drivers within departments may not be identified, while zero-based budgeting is a more granular process that aims to identify and justify expenditures. Since zero-based budgeting is more involved, however, the costs of the process itself must be weighed against the savings it may identify.

A zero-based budget is prepared without depending any of historical data. It starts from scrap by considering the budget starts for a new business.

Simply, Its the budget which has no historical basis (ignoring the past budgeting), the main purpose is to enforce the managers to keep heads up and do the real forecasting, Plus, Its decrease the padding (increase the cost & decrease the revenue in budgeting to show the favorable variances at the end) while making budgeting if existed.

Nice Question :)

Zero-based budgeting is a method of budgeting where all expenses related to the concerned financial period are based on estimated actual expenses for that period instead of being calculated at a fixed rate incremental basis over the previous period.

Every expenses activity has to be justified, explaining the revenue which each cost will attract for the organization.