ZERO-BASED BUDGETING
Zero-based budgeting (also known as priority-based budgeting) emerged as an attempt to
overcome the limitations of incremental budgets. This approach requires that projected
expenditure for existing activities should start from base zero rather than last year’s
budget. In other words, managers are required to justify all budgeted expenditure rather
than just the changes from the previous year. Besides adopting a ‘zero-based’ approach,
zero-based budgeting (ZBB) also focuses on programmes or activities instead of functional
departments based on line-items which is a feature of traditional budgeting. Programmes
normally relate to various activities undertaken by municipal or government organizations.
Examples include extending childcare facilities, improvement of health care for senior
citizens and the extension of nursing facilities.
ZBB is best suited to discretionary costs and support activities. With discretionary costs
management has some discretion as to the amount it will budget for the particular activity
in question. Examples of discretionary costs include advertising, research and development
and training costs. There is no optimum relationship between inputs (as measured by the
costs) and outputs (measured by revenues or some other objective function) for these
costs. Furthermore, they are not predetermined by some previous commitment. In effect,
management can determine what quantity of service it wishes to purchase and there is no
established method for determining the appropriate amount to be spent in particular
periods. ZBB has mostly been applied in municipal and government organizations where
the predominant costs are of a discretionary nature.
ZBB involves the following three stages:
• a description of each organizational activity in a decision package;
• the evaluation and ranking of decision packages in order of priority;
• allocation of resources based on order of priority up to the spending cut-off level.
Decision packages are identified for each decision unit. Decision units represent separate
programmes or groups of activities that an organization undertakes. A decision package
represents the operation of a particular programme with incremental packages reflecting
different levels of effort that may be expended on a specific function. One package is usually
prepared at the ‘base’ level for each programme.
Zero-based budgeting (also known as priority-based budgeting) emerged as an attempt to
overcome the limitations of incremental budgets. This approach requires that projected
expenditure for existing activities should start from base zero rather than last year’s
budget. In other words, managers are required to justify all budgeted expenditure rather
than just the changes from the previous year. Besides adopting a ‘zero-based’ approach,
zero-based budgeting (ZBB) also focuses on programmes or activities instead of functional
departments based on line-items which is a feature of traditional budgeting. Programmes
normally relate to various activities undertaken by municipal or government organizations.
Examples include extending childcare facilities, improvement of health care for senior
citizens and the extension of nursing facilities.
ZBB is best suited to discretionary costs and support activities. With discretionary costs
management has some discretion as to the amount it will budget for the particular activity
in question. Examples of discretionary costs include advertising, research and development
and training costs. There is no optimum relationship between inputs (as measured by the
costs) and outputs (measured by revenues or some other objective function) for these
costs. Furthermore, they are not predetermined by some previous commitment. In effect,
management can determine what quantity of service it wishes to purchase and there is no
established method for determining the appropriate amount to be spent in particular
periods. ZBB has mostly been applied in municipal and government organizations where
the predominant costs are of a discretionary nature.
ZBB involves the following three stages:
• a description of each organizational activity in a decision package;
• the evaluation and ranking of decision packages in order of priority;
• allocation of resources based on order of priority up to the spending cut-off level.
Decision packages are identified for each decision unit. Decision units represent separate
programmes or groups of activities that an organization undertakes. A decision package
represents the operation of a particular programme with incremental packages reflecting
different levels of effort that may be expended on a specific function. One package is usually
prepared at the ‘base’ level for each programme.
