The technique of zero base budgeting provides a solution for overcoming the limitations of traditional budgeting by enabling top management to focus on priorities, key areas and alternatives of action throughout the organisation. .

Some of the problems, which top management has to face are:

1. Programs and activities involving wasteful expenditure are not identified, resulting in avoidable financial and other costs.
2. Inefficiencies of a prior year are carried forward in determining subsequent years' levels of performance.
3. Managers are not encouraged to identify and evaluate alternative means of accomplishing the same objective.
4. Decision-making is irrational in the absence of rigorous analysis of all proposed costs and benefits.
5. Key problems and decision areas are not highlighted. Thus, no priorities are established throughout the organisation.
6. Managers tend to inflate their budget requests resulting in more demand for funds than their availability. This results in recycling the entire budgeting process.

The technique of zero base budgeting suggests that an organisation should not only make decisions about the proposed new programs, but, should also review the appropriateness of the existing programs from time to time. Such a review should particularly be done of such responsibility centers where there is relatively high proportion of discretionary costs. Costs of this type depend on the discretion or policies of the responsibility center or top managers. These costs have no direct relation to volume of activity. Hence, management discretion typically determines the amount budgeted. Some examples are - expenditure on research and development, personnel administration, legal advisory services.

Zero base budgeting, as the term suggests, examines or reviews a program or function or responsibility from 'scratch', The reviewer proceeds on the assumption that nothing is to be allowed. The manager proposing the activity has, therefore, to justify that the activity is essential and the various amounts asked for are reasonable taking into account the outputs or results or volume of activity envisaged. No activity or expense is allowed simply because it was being allowed or done in the past. Thus, according to this technique each program, whether new or existing, must be justified in its entirety each time a new budget is formulated. It involves:

1. dealing with practically all elements of managers' budget requests
2. critical examination of ongoing activities along with the newly proposed activities
3. providing each manager a range of choices in setting priorities in respect of different activities and in allocating resources

Process of Zero-Base Budgeting

The following steps are involved in zero base budgeting:

Determining the objectives of budgeting: The objective may be to effect cost reduction in staff overheads or it may be to drop, after careful analysis, projects which do not fit into achievement of the organizations objectives etc.

Deciding on scope of application: The extent to which the zero base budgeting is to be introduced has to be decided, i.e. whether it will be introduced in all areas of the organization’s activities or only in a few selected areas on trial basis.

Developing decision units: Decision units for which cost - benefit analysis is proposed have to be developed so as .to arrive at decisions whether they should be allowed to continue or be dropped. Each decision unit, as far as possible should be independent of other units so that it can be dropped if the cost analysis proves to be unfavorable for it.

Developing decision packages: A decision package for each unit should be developed. While developing a decision package, answers to the following questions would be desirable:

1. Is it necessary to perform a particular activity at all? If the answer is in the negative, there is no need to proceed further.
2. How much has been the actual cost of the activity and what has been the actual benefit both in tangible as well as intangible forms?
3. What should be the estimated cost of the level of activity and the estimated benefit from such activity?
4. Should the activity be performed in the way in which it is being performed and what should be the cost?
5. If the project or activity is dropped, can the unit be replaced by an outside agency?

After completing decision packages for each unit, the units are ranked according to the findings of cost-benefit analysis. Essential projects are identified and given the highest ranks. The last stage is that of implementing the decisions taken in the light of the study made. It involves the selection and acceptance of those projects which have a positive cost-benefit analysis or which are capable of meeting the objectives of the organisation.

 Advantages of zero base budgeting