Question

You have been asked to prepare a report for the Chief Executive of the organization you work for on the details of the zero-base budgeting technique.

Prepare a report explaining:

a) What zero-base budgeting is and to which areas it can be best applied.

b) What advantages the technique has over traditional type budgeting systems.

c) How the organization might integrate such a technique.

Make sure you expand on your own words, do not copy/paste verbatim from the book or any article.

Answer 1

a) Zero base budgeting is preparing budget on the bases of actual expense that would have been incurred to run a business. With each expense incurred under zero base budgeting the management has to explain the reason behind it. It is a detailed analysis where in the management has to justify the sound basis on making sich expenditure. Selling, Administration, Overhead expenses are included in this type of Budgeting.

b) Under traditional budgeting management take the previous year expense as the base year and adjust it with a percentage increase or decrease according to his/ her expectation. The result is well justifiable aligned with the business strategy. It will be used in cost benefit analysis. It improves operation and efficiency of the company. It is based on actual analysis step by step.

c) There are steps-

1. Start - Investigation starts from ground zero. Without using last yeaar data, actual expense is worked out.
2. Evaluate - Use elimination method to eliminate unnecessary cost
3. Justify - reasoning of cost that is or are necessary
4. Streamline - Determining on hows. How thee product mix with a strategy is best suited.
5. Execute - A definite plan is roled out and executed