9159001 Zero Base Budgeting A And Performance Budgeting


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9159001 Zero Base Budgeting A And Performance Budgeting

  1. 1. Approaches to Budgeting <ul><li>Top-down approach </li></ul><ul><ul><li>Upper management prepares budgets and passes them down to individual departments </li></ul></ul><ul><li>Bottom-up approach </li></ul><ul><ul><li>Each department supplies the data and passes them up to the next level of management </li></ul></ul>
  2. 2. Advantages of Cost-based <ul><li>Budget is stable </li></ul><ul><li>Change is gradual and planned </li></ul><ul><li>Managers can operate on consistent basis </li></ul><ul><li>System is simple and easy to understand </li></ul><ul><li>Impact of change can be seen quickly </li></ul>Disadvantages of Cost-based <ul><li>No incentive to develop new ideas </li></ul><ul><li>No incentive to reduce costs </li></ul><ul><li>May become out of date </li></ul><ul><li>Promotes spending up to keep budget levels consistent </li></ul><ul><li>Priority for resources may have changed since the budget was originally set </li></ul>
  3. 3. Zero Base Budgeting Zero Based Budgeting implies that managers need to build a budget from the ground up, building a case for their spending as if no baseline existed- to start at zero. The purpose of ZBB is to re-evaluate and re-examine all programs and expenditures for each budgeting cycle by analyzing workload and efficiency measures to determine priorities or alternative levels of funding for each program or expenditure. Through this system, each program is justified in its entirety each time a new budget is developed.
  4. 4. Zero-based Budgeting <ul><li>Requires managers to start at zero for each budget period and justify every input and output when developing the budget </li></ul><ul><li>Major Steps in the Process </li></ul><ul><ul><li>Definition of the Mission and Goals of the Organization </li></ul></ul><ul><ul><li>Identification of Cost Centers </li></ul></ul><ul><ul><li>Analysis of Each Cost Center </li></ul></ul><ul><ul><li>Ranking of Cost Centers and Evaluating Alternatives </li></ul></ul><ul><ul><li>Acceptance and Allocation of Resources </li></ul></ul><ul><ul><li>Budget Preparation </li></ul></ul><ul><ul><li>Monitoring and Evaluation </li></ul></ul><ul><li>Effective and Efficient Use of Resources to Achieve Goals </li></ul>
  5. 5. Advantages of Zero-based <ul><li>Justified spending </li></ul><ul><li>Identifies Redundancies </li></ul><ul><li>Focuses use of resources </li></ul><ul><li>New and old projects are compared </li></ul><ul><li>Elimination of waste </li></ul>Disadvantages of Zero-based <ul><li>Costly and complex </li></ul><ul><li>Loss of long-term planning </li></ul><ul><li>Judging and Prioritizing may become political </li></ul><ul><li>May not be as useful in manufacturing </li></ul>
  6. 6. Cost-based vs Zero-based Budgeting N/A Cuts from what was expected Subtractions To justify and prioritize all business activities To justify perceived needs and specify the associated costs of those needs Purpose Individual business activities, projects, contracts, and expenses Changes in inflation Additions Evaluating each business activity Adding to and subtracting from last year’s budget Focus $0.00 Prior period’s costs Starting Point Zero-based Cost-based
  7. 7. <ul><li>Performance budgeting is a system of planning, budgeting, and evaluation that emphasizes the relationship between money budgeted and results expected. </li></ul><ul><li>Performance budgeting: </li></ul><ul><li>Focuses on results . Departments are held accountable to certain performance standards. There is a greater awareness of what services taxpayers are receiving for their tax dollars. </li></ul><ul><li>Is flexible . Money is often allocated in lump sums rather than line-item budgets, giving managers the flexibility to determine how best to achieve results. </li></ul><ul><li>Is inclusive. It involves policymakers, managers, and often citizens in the budget “discussion” through the development of strategic plans, identification of spending priorities, and evaluation of performance. </li></ul><ul><li>Has a long-term perspective . By recognizing the relationship between strategic planning and resource allocation, performance budgeting focuses more attention on longer time horizons. </li></ul>Performance Budgeting
  8. 9. Performance Budgeting <ul><li>Advantages </li></ul><ul><li>Forward planning is enhanced </li></ul><ul><li>Clear appreciation of ongoing cost of pursuing government objectives </li></ul><ul><li>Better management practices with the comparison of objectives with achievements </li></ul><ul><li>Better public disclosure </li></ul><ul><li>Improves the accountability of government in general and the public services in particular </li></ul><ul><li>Disadvantages </li></ul><ul><li>Rationalizing the irrational (or highly political) process </li></ul><ul><li>Complete rationality involves listing of all available alternative ways in which money could be spent </li></ul>