What Is Zero-based Budgeting ? What Are The Advantages Of Zero-based Approach Over The Traditional Approach?

Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for
    profit sectors of the economy. Under
    zero based budgeting managers are required to justify all budgeted
    expenditures, not just changes in the budget from the previous year. The
    base line is zero rather than last year's budget.
    
    
In traditional approach of budgeting, the managers start with last year's
    budget and add to it (or subtract from it) according to anticipated needs.
    This is an incremental approach to budgeting in which the previous year's
    budget is taken for granted as a baseline. This approach is called
incremental budgeting.
    
    Zero based budgeting  approach requires considerable documentation. In
    addition to all of the schedules in the usual master budget, the manager
    must prepare a series of decision packages in which all of the activities of
    the department are ranked according to their relative importance and the
    cost of each activity is identified. Higher level managers can then review
    the decision packages and cut back in those areas that appear to be less
    critical or whose costs do not appear to be justified.
    
Zero based budgeting is a good idea. The only issue is the frequency with which
a ZBB review is carried out. Under zero based budgeting (ZBB) ,the review is performed every year. Critics
    of such type of budgeting charge that properly executed zero based budgeting
    is too time consuming and too costly to justify on an annual basis. In
    addition, it is argued that annual reviews soon become mathematical and that
the whole purpose of zero based budgeting is then lost. Whether or not a company
should use annual reviews is a matter of judgment. In some
    situations, annual zero based reviews may be justified; in other situations
they may not because of the time and cost involved. However, most managers would
at least agree that on occasion zero based reviews can be very helpful.

    Advantages
    and Disadvantages of Zero Based Budgeting:

    
Advantages | benefits of zero based budgeting
process:
    

1. Efficient allocation of resources, as it
         is based on needs and benefits.
2. Drives managers to find cost effective
         ways to improve operations.
3. Detects inflated budgets.
4. Municipal planning departments are exempt
         from this budgeting practice.
5. Useful for service departments where the
         output is difficult to identify.
6. Increases staff motivation by providing
         greater initiative and responsibility in decision-making.
7. Increases communication and coordination
         within the organization.
8. Identifies and eliminates wasteful and
         obsolete operations.
9. Identifies opportunities for outsourcing.
         
10. Forces cost centers to identify their
          mission and their relationship to overall goals.

    Disadvantages | Limitations of zero based
    budgeting method.
    

1. Difficult to define decision units and
         decision packages, as it is time-consuming and exhaustive.
2. Forced to justify every detail related to
         expenditure. The research and development (R&D) department is threatened whereas the production
         department benefits.
3. Necessary to train managers. Zero based
         budgeting (ZBB) must be clearly understood by managers at various levels to be
         successfully implemented. Difficult to administer and communicate the
         budgeting because more managers are involved in the process.
4. In a large organization, the volume of
         forms may be so large that no one person could read it all. Compressing
         the information down to a usable size might remove critically important
         details.
5. Honesty of the managers must be reliable
         and uniform. Any manager that exaggerates skews the results.