Zero-based budgeting emerged in the late 1960s as a response to incremental budgeting. With zero-based budgeting, all budgets start at zero and activities/costs are only allowed if they are justified under investigation. All requests for resources must be presented and evaluated on the basis of cost-benefit. Zero-based budgeting is best suited to discretionary spending where there is no clearly defined input-output relationship such as in marketing, research and development, and training or public sector organization such as district councils.
The zero-based budgeting system is a budgeting system that require every item of expenditure to be justified as if a particular activity or program is taking off the first time.
The following are stages involved in zero-based budgeting systems:
Identification of decision unit/tasks and formulating operational plans
You are the management account of group of companies and your managing director has asked you to explore the possibilities of introducing a zero based system experimentally in one of the operating companies in place of its existing orthodox system.
- Explain how zero-base budgeting would work within the company chosen
- What advantages it might offer over the existing system?
- What problems might be faced in introducing a zero-base budgeting scheme?
- The future you would look for in selecting the operating company for the introduction in order to obtain the most beneficial result from the experiment.