Question

Zero-based budgeting was designed as an alternative to: incremental budgeting, rolling budgets, flexible budgeting, annual budgets.

Answer 1

Meaning of Zero Based Budgeting:

In Zero based budgeting the budget is prepared with a zero base. It re-evaluates each and every item of cash flow statement and justify all the expenditure that is to be incurred by the department.

How Zero-based budgeting is designed as an alternative to: incremental budgeting, rolling budgets, flexible budgeting, annual budgets:

a) Accuracy:

The other methods of budgeting i.e. incremental budgeting, rolling budgets, flexible budgeting, annual budgets some arbitrary changes are made in the previous years budget however in case of zero based budgeting each department scrutinize each item of the cash flow. It helps in reducing cost.

b) Efficient Allocation of resources:

This method only looks at actual numbers and not historical numbers. It helps in efficient allocation of resources.

c) Reduction in redundant (unnecessary) activities:

It helps in dentification of various opportunities and more cost-effective ways of doing things by removing all the unproductive and unnecessary activities.

d) Inflation of budget:

As each and every item of cash flow is justified, it helps in overcoming the weakness of budget inflation which lies with the Incremental budgeting.

e) Motivates the employees:

It motivates employees by involving them in decision-making and It also improves coordination and communication within the department.

From the above discussion it is concluded that traditional budgeting technique focuses on a narrow set of cost and cost reduction tools however zero based budgeting examines each and every cost area in a cash flow..

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