“Zero based budgeting is the planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch and shifts the burden of proof to each manager to justify why he should spend money at all. The approach requires that all activities be analyzed in decision packages which are evaluated by systematic analysis and ranked in order of importance.” — Peter A. Pyher
In zero based budgeting, a manager is to justify why he wants to spend. The preference of spending on various activities will depend upon their justification and priority for spending will be drawn. It will have to be proved that an activity is essential and the amount asked for all are really reasonable, taking into account the volume of activity.
Procedure of Zero Based Budgeting:
Process of zero based budgeting involves the following steps:
Merits/Benefits of Zero Based Budgeting:
Benefits and advantages of zero based budgeting are as follows:
1. Zero based budgeting focuses management process on analysis and decision making because it requires managers to review their activities every time when a budget is developed.
2. It considers every time alternative ways of performing the same job because zero is taken as the base every time at the preparation of the budget.
3. The management is able to make optimum use of resources. The expenditure will be undertaken only when it will have justification.
4. It is not based on incremental approach, so as it promotes operational efficiency because it requires managers to review and justify their activities or the funds requested.
5. It is appropriate for those areas whose output is not related to production. It becomes difficult to evaluate the performance of those sides which are not directly related to production but undertake other activities.
6. It improves efficiency of the management. Every manager will have to justify the demand for resources.