Question

Briefly describe some of the advantages and disadvantages of a Zero Based budgeting process.

How does this compare to the process used in your organization?

Answer 1

Zero Based budgeting process is the type of budgeting in which all the expenses are set to zero at the starting of each new period.

Advantages-

1. Zero Based budgeting process helps cutting the expenses. It helps control the costs.
2. Helps innovate new methods which costs less.

Disadvantages-

1. Time consuming process.
2. Doesn’t include fixed costs of each period. When the costs are set to zero, it erases the cost of fixed assets that were installed in the very beginning of the company.

This is different from the method that we have in our organizations. It is a method called Incremental budgeting. This is different from Zero Based budgeting process because the expenses aren’t set to zero at the starting of each period. Incremental budgeting is a method in which the budget is prepared using last period statistics and an incremental budget is added for the next period. This helps the budget to stay stable.