Question

Budgeting has a number of different purposes including: Planning; Control; Performance evaluation; Motivation. Some managers believe that zero-based budget is more beneficial than other types of the budget for firms.’

Required:

Critically discuss the above statement with reference to academic literature. In your discussion, you should refer to the budgeting systems you learned in this module.

Answer 1

A budgeting system helps an organization to plan and decide amount to be spent in a particular activity. A proper budget structure needed to be prepared for the proper functioning of budgeting system. It is a crucial activity for an organization and hence it should be conducted in a well planned manner.

There are various budgeting systems and all have their own ways to set budgets. It depends on organization and their types of activities that which budgeting system is being used by the organisations.

The various budgeting systems are :- Incremental ; Activity based; Value proposition; Zero based.

As the statement made above that some managers think this zero based budget being more beneficial from others, let us look in detail into it.

The zero based budget has its base as zero as each expense is taken as to be performed in a new period. In this, each and every expense is needed to be properly justified.

Here are some reasons for giving preference to zero based budget -

i) As this system focuses on only those expenses which are of very much importance, it contributes in efficiently allocating various resources in areas where they are most beneficial and most needed.

ii) Management is very much focused on cost incurred by the company and hence this is cost effective method. Managers are also trying to find more cost effective ways in order to have improvements in the related activities.

iii) If there is any inflated budget in the system, this zero base budget helps in recognizing that.

iv) As we know that there are situation when the service departments, they are not able to find out the exact criteria for making budget, in those cases it is very beneficial. As per the need and requirements of the department budget is set.

v) It requires a lot of decision making and all employees and stags are made to contribute in decision making process hence this results in increasing the enthusiasm and motivating employees. Also this leads to improvement in coordination and communication among organization managers and various staffs.

vi) If we see precisely, this system helps to reduce wastage to a great extent. Also it detects the operations that are no longer profitable.

So we saw why this zero based budgeting system should be preffered on other system. Though it is little time taking, but the decisions taken are very precisely done and costs incurred are optimal. And hence the organization will have a huge advantage by adopting this method of budgeting.