Question

• What are the advantages and disadvantages of zero-base budgeting?
• Why is the capital budgeting process so important to a company’s success?

Answer 1

1. Zero based budgeting in management account is based upon preparation of a budget from the scratch and zero base.

Advantage of zero based budgeting as follows-

A. Accuracy-zero based budgeting relook the each and every item of the cash flows and compute their operational cost.

B. Efficiency-zero based budgeting is having a high efficiency adjusting system.

C. Coordination and cooperation-zero based budgeting helps in management of better coordination and cooperation among employees.

D. Budget inflation-zero based budgeting also takes budget inflation into the factor while preparing the budget.

Disadvantage of zero based budgeting as follows-

A.lack of experience and expertise can cause tremendous problem as it relates to examining of each and every item.

B. It is a highly time consuming process as it it makes budget after reading minute details

C. It will always have a high manpower requirement so it is also disadvantagious.

2. Capital budgeting processes is important for a company success as it us related to allocation of the capital to such resources where maximization of profit has the highest probability and it also focuses on minimization of the risk.

capital budgeting is a process which focuses on allocating the capital to such resources which will help the company in generating the highest rate of return.

capital budgeting process combines of a whole lot of methods like net present value, it also come mines methods like internal rate of return payback periods excetra.

it is highly important in order to make efficient capital decision to survive and sustain in the long run and to get a competitive edge because it will help the company to generate higher rate of return which will beat the overall cost of capital and it will help in gaining the market share.