ZERO BASED BUDGETING

The budget does not necessarily use historical variances. It requires that every line item be approved by management and that every amount be fully considered before making an assumption or prediction about anticipated expense, revenue, or other item.

 

Advantages

  1. Efficient allocation of resources, as it is based on needs and benefits rather than history.
  2. Drives managers to find cost effective ways to improve operations.
  3. Detects inflated budgets.
  4. Increases staff motivation by providing greater initiative and responsibility in decision-making.
  5. Increases communication and coordination within the organization.
  6. Identifies and eliminates wasteful and obsolete operations.
  7. Identifies opportunities for outsourcing.
  8. Forces cost centers to identify their mission and their relationship to overall goals.

Zero based Helps in identifying areas of wasteful expenditure, and if desired, can also be used for suggesting alternative courses of action.