ZERO BASE BUDGETING &ZERO BASE BUDGETING & PERFORMANCE BUDGETING PERFORMANCE BUDGETING ZERO BASE BUDGETING &ZERO BASE BUDGETING & PERFORMANCE BUDGETING PERFORMANCE BUDGETING

Presented By:

Ravi kumar

Roll no. 22

Under guidance of: Dr. Shashi Srivastava

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Outline of presentation• ZBB

– Introduction – Definition – Traditional budgeting vs. ZBB– Essential of ZBB– Preparation of ZBB– Advantage of ZBB– Disadvantage of ZBB

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Outline cont..• Performance budgeting

• Introduction • Definition • Purpose• Preparation • Limitation

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Introduction • ZBB is the latest technique and it has the

increased use as a managerial tools.• This technique was first used in America in

year 1962.• It start from the ‘scratch’.• Every year is taken as a new year.• Zero is taken as base and likely future

activities are decided according to the present situation.

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Definition • “ A planning and budgeting process which require

each manager to justify his entire budget in detail from ‘scratch’ and shift the burden of proof to each manager to justify why he should spend money at all. The approach require that all activities be analyzed in decision packages, which are evaluated by a systematic analysis and ranked in order of importance.”

-Peter A. Phyer

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Definition cont…• “ A method of budgeting whereby

all activities are re-evaluated each time a budget is set. Discrete level of each activity are valued and a combination chosen to match funds available.”

-CIMA

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Traditional budgeting vs. ZBB

Basis of diff. Traditional budgeting ZBB

1- Emphasis

2-Approach

It is more a/cing oriented.It lays emphasis on ‘how much.’

Its approach is monitoring towards expenditure.

It is decision oriented.It lays emphasis on ‘why’.

Its approach is towards achieving objective.

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Cont…

Basis Traditional ZBB

3-Focus

4-Commun.

Its focus is on increase or decrease in expenditure over past.

Vertical due to traditional budgeting.

Its focus is on cost benefit analysis.

Both type of comm. i.e. horizontal and vertical.

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Essential of ZBB• Concentration of effort is not on ‘how

much’ but on the ‘why’.• Choices are made on the basis of what

each unit can offer for a specific cost.• Individual unit’s object is linked to the

corporate target.• Quick budget adjustment can be made if,

during the operating year cost are need to be maintain expenditure level.

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Cont…• Alternatives ways are considered.

• Participation of all level in decision making.

• It require for a manager to justify the resources requested for all activities and project in rank order.

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Preparation of ZBB

• Determination of objective.• Extent of ZBB should be decided.• Development of decision packages.• Cost and benefit analysis should be

undertaken.• Selecting and approving decision

packages and finalizing the budget.

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Advantages of ZBB• It enables the manager to allocate the fund

according to the jurisdiction of the programme.

• It improve the efficiency of management. • It help in identifying the economical and

wasteful areas.• It enables the management to make optimum

use of resources.

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Cont…• It is appropriate for those areas which output

is generally not related to production.• This technique is elastic because budget is

prepared every year on zero base.• It enable the management for the systematic

evaluation of different operation and programmes.

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Disadvantages of ZBB

• Computation of cost benefit analysis is not possible in case of non financial matter.

• Difficulties in formulation and ranking of decision packages as every manager may not have the necessary expertise.

• It require a lot of training for manager.• Where objective is very difficult to determined

in case of R&D ZBB has no advantage.• It involve a lot of time and cost of operating

ZBB is also very high.

Performance Performance BudgetingBudgeting

Performance Performance BudgetingBudgeting

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Introduction • It depend on the functions, activities and

projects.

• Performance budgeting is a budgeting system in which input cost are related to the performance i.e. to the end result.

• It lays emphasis on the result rather than the expenditure incurred.

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DefinitionPerformance budgeting technique is the process

of analyzing, identifying, simplifying and crystallizing specific performance objective of a job to be achieved over a period in the frame work of organization objective, the purpose and objective of the job. The technique is characterized by its specific direction towards the business objective of the organization.

-NIBM (Mumbai)

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Purpose of performance budgeting

• To review at every stage and every level of organization, so as to measure progress towards the short term and long term objectives.

• To assess the effect of the decision making of supervisor to the middle and top managers.

• To bring annual plans and budget in line with the short and long term plan objectives.

• To facilitate the more effective performance audit.

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Preparation-Example • A company has a profit plan approved for selling 5000

unit at 10/unit.the budgeted v.c. was 4/unit and f.c. was 20000, and planned income was 10000/month. Now because of shortage of raw material the plant could produce only 4000 units and cost of production was increased by 0.5/unit. Consequently the s.p. was raised by 1.0/unit. To modify production process in order to meet material shortage, the company incurred a expenditure of 1000 on R&D. set out a performance budget and summary report.

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Performance BudgetFor the month of…

Budget Actual

Units Amount per unit

(Rest.)

Total amount(Rest.)

Units Amount per unit

(Rest.)

Total amoun

t(Rest.)

Sales Less: variable cost Contribution Less: fixed cost

50005,000

10.004.00

50,00020,000

40004,000

11.004.50

44,00018,000

6.00 30,00020,000

6.50 26,00021,000

10,000 5,000

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Summary Report Rs.Planned income 10,000Selling price variance +4,000V. C. variance(due to increase in cost of production) -2,000Activity variance (due to shortage of raw material) -6,000F.C. variance (R&D expenditure) -1,000

Actual income 5000

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Limitation of P.B.• Difficulty in classifying program and activities.

• Problem in appraisal of various scheme.

• Moreover it enables only quantitative evaluation scheme sometimes the needed result can not be measured.

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Thank you