Zero-based budgeting

Question 1

What is ZBB?

Answer 1

In ZBB, all activities and costs are budgeted from scratch. For every activity, managers look at its costs and its purpose, and look at whether there are alternative ways of doing it.

Question 2

What are the steps in creating a ZBB?

Answer 2

*Step 1 : Establish activities and objectives.
*Step 2 : Establish decision packages
*Step 3 : Perform cost/benefit analysis and rank decision packages.
*Step 4 : Allocate resources

Question 3

Define Step 1 in ZBB?

Answer 3

*Step 1 : Establish activities and objectives.

The fist stage of the process will be to decide on the decision units: Each activity will have an objective associated with it.

For example, one objective of production may be to obtain high quality raw materials, such as leather, from the most sustainable suppliers.

Question 4

Define Step 2 in ZBB?

Answer 4

*Step 2 : Establish decision packages

For each activity, there will be potentially different ways in which the objective can be achieved or different levels of expenditure that can be incurred. These choices are
reflected in decision packages which should be drawn up by those people closest to the
activities (e.g. purchasing managers rather than the finance team).

For example, should we continue outsourcing distribution or bring it in‐house?

Question 5

Define Step 3 in ZBB?

Answer 5

*Step 3 : Perform cost/benefit analysis and rank decision packages

Once the decision packages have been fully developed, a cost/benefit analysis needs to be performed.

For example, we are continually striving to improve our supply chain. However, if suitable or
even better quality can be achieved by outsourcing at a lower cost, then the objective of
profitability can also be
enhanced.

Each decision package would need to be considered against these benefits and then ranked
in order of preference.

Question 6

Define Step 4 in ZBB?

Answer 6

*Step 4 : Allocate resources

Once all decision packages across the business for support activities have been ranked the whole budget would need to be considered and the resources available allocated to each part of the business accordingly.

Question 7

What are the advantages of participative (bottom-up) budget setting?

Answer 7

*Improved quality of forecast to use as the basis for our budgets.
*Improves motivation as budget holders are more likely to want to work to achieve a budget that they have been involved in setting themselves, rather than one that has been imposed on the by more senior staff.
*Managers are more likely to view their targets as fair, achievable and realistic, especially if they are flexed.
*Managers will feel like their opinion is being listened to and that their opinion is
valuable, thus improving morale.