0 Base Budgeting

How much budget allocation request should I make? Base Budgeting

• Starts from scratch or zero • Not on the basis of trends or historical levels of expenditures.

Brain child of • Peter Phyrr of Texas instruments

Mr. Jimmy carter • President of U.S.A. tried ZBB in federal budgeting as a means of controlling state expenditures.

• Budget for the next period is zero. • Justify every project, activity, process or function

manager is to justify • Why money should be spent at all ? • Sets asides all previous year’s inefficiencies and extravagancies • Which activities we shall give top most priority ?

Cost benefit analysis • Of each of the activity under his control. • Need to recognize less essential activities • Curtail or eliminate • Made into profitable activities

Activities shall be selected in the order of their importance. 4 3 2 1

Steps in the process of ZBB. • Develop an operational plan or decision package. C O R

What is a decision package • A) It is to identify and describe a particular activity evaluating and ranking the activity against each activity • B) deciding to accept or reject or amend the activity

Each work package shows • Costs • Returns • Purpose • Expected results • Alternatives available • Consequences if activity is not performed or reduced

These packages • can be mutually exclusive • Incremental packages

Mutually exclusive means • Each contain an alternative way of doing the same job.

Incremental packages • Define different levels of efforts

Work package no 1. • Setting up out-door dispensary with equipments and medicines but no medical staff • 0+ Rs. 50,000= Rs. 50,000

Work package no. 2 • Providing minimum staff • With budgeted incremental costs Rs. 30,000

Work package no.3 • Purchase of more equipments and medicines and providing more staff in the 2nd phase • Rs.80,000+1,20,000 = Rs.200,000

Work package no. 4 Special equipments and specialists staff and 3 beds for emergency Rs. 2,00,000+2,00,000=Rs. 400,000

Work package no.5 • Establishment of 30 bedded hospital • Rs. 400,000+ 16,00,000= Rs. 20,00,000

Work package Package target Incremental Total cost no. costs Rs. Rs. 1 Out door 50,000 50,000 dispensary 2 Minimum staff 30,000 80,000 3 More 120,000 2,00,000 equipments and staff 4 3 beds for 200,000 4,00,000 emergency 5 30 bedded 16,00,000 20,00,000 hospital

Step 2. • Ranking of decision packages based on CBA

Step 3 • Allotment of funds based on pyramid ranking system

Advantages of ZBB • Out of date inefficient operations identified

• Allows managers to quickly respond to changes in external environment

• It promotes questioning and challenging attitude

• CBA of each activity costs BENEFITS

• Psychological impact “pay his way”

Defects of ZBB • Increased paper work

• Cost of preparing many packages • Subjective ranking • Resistance by bad managers • More emphasis on short term benefits • Continual updating of each existing package and new packages • Qualitative benefits ignored

0 Base Budgeting

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