Question

Discuss the development of the Zero Based Budgeting, highlighting the stages, uses, merits and demerits (

Answer 1

ZERO BASED BUDGETTING

Zero based budgetting was developed with the objective to reduce the cost of business . In zero based budgetting , only the costs that are necessary for the business in the upcoming period are taken into consideration. This method is completely different from the traditional budgetting where only the increase or decrease from past period cost are taken into consideration rather than what is actually requiered in the period of business.

With zero based budgetting each and every business cost is analysed to see if it is necessary for the business in the upcoming period or if there is is any cost cutting opportuinity available for the particular cost, example : a vendor who supples the materials requiered for business at reduced rate than presently used by the business.

A zero based bugetting creates a new budget for each period of business with the costs which are actually requiered whereas in traditional budgetting a standard preset budget is followed by only recording variances not matter if the costs are not relevent for the period of business. By following zero based bugetting , the budgets of each period can be highly fluctuating depending on the needs of business.

PROCESS OF ZERO BASED BUDGETTING

• Study the business and the activities and tasks involved in the business
• relate the business tasks to the actual costs incurred in carrying out the tasks
• seek alternate proposals or ways to reduce the cost associated with the business activities
• choose the best alternative with reduction of cost being the objective
• set a budgets with relevent activities requiered for business and the new cost estimates found from the analysis above

MERITS:

1. By employing zero based budgetting there can be more accuracy and precision in setting the budgets for the relevent period of business i.e it does not merely state historic numbers which has no relevence to the real time business

2. In this method of budgetting the employees are fully cordinated to analyse each departmental costs and necessary cut backs .this encourages employee participation in the decision making process of the business

3. This method has cost cut as its main objective therefore this can in turn improve the profitability of the business

4. this method realises the cost that are actually requiered for the business hence gives a proper picture of the profitabilty of the business

DEMERITS

1.It is highly time consuming as it has to evaluate each and every elements of the necessary business costs

2. need for expert evaluation is also a concern as not all organistions have the workforce to conduct an expert evaluation

3. the budgets can be highly fluctuating and therefore a comparative analysis may not be possible

4 This method require frequent reviews and updations therefore it can be additional overhead for business.