(c) Traditional budgeting, sometimes called incremental budgeting, takes a current level of spending almost without examination and discussion takes place on any extra expenditure. Zero-based budgeting (ZBB) is an approach which takes nothing for granted. It requires that each budget centre makes a detailed case for all of its budget allocation each year. As a result all spending is subject to scrutiny, not just incremental spending. This technique would not suit expenditure planning in departments of a manufacturing company because clear relationships of input and output will exist
and be defined by standard values. In less clearly defined areas such as service departments or service orientated industries, both private and public sector, it might have some value if selectively applied.
Benefits
It is possible that economies and increased efficiency could result if departments were to justify all not just incremental expenditure. This approach prevents unnecessary cost and budgetary slack being built into the budget which so often occurs with incremental budgeting as well as identifying inefficiencies in the business. It is argued that if expenditure were examined on a cost/benefit basis a more rational allocation of resources would take place.
Such an approach would force managers to make plans and prioritise their activities before committing themselves to the budget. It should achieve a more structured involvement of departmental management and should improve the quality of decisions and management information.
Difficulties
It could be expensive however, in time and effort to analyse all expenditure and difficult to establish priorities for the activities or decision packages. Managers are often reluctant to commit themselves to it because they believe they already do it. This approach will often meet with much resistance from managers at the added scrutiny to their budgets. Occasionally ZBB could result in short term decisions being taken as managers wish to maximise their short term profit and therefore delay spending which does not pay back immediately.
Any system which encourages managers to examine and communicate about their spending and performance levels must be useful, providing it does not prevent individuals fulfilling their other duties and responsibilities. |
