ZERO-BASED
BUDGETING
UNLEASHING THE POTENTIAL FOR
COST CONTROL
ZEROBASED
BUDGETING
Zero-Based Budgeting (ZBB) is a cost-management
methodology that requires justifying every expense
for each new budget period, starting from zero.
Unlike traditional incremental budgeting, which
adjusts previous budgets to account for new costs,
ZBB rebuilds budgets from scratch.
This approach ensures spending aligns with
organizational priorities and eliminates unnecessary
expenditures.
TRADITIONAL
BUDGET
ZERO-BASED
BUDGET
Based on prior year’s budget
Starts from zero
Only new expenses need to be
justified
Every expense must be justified
Based on historical information
Based on industry norms and best
practices
Simpler strategy
More complex strategy
• In 1960s, Peter Pyhrr was hired by Dallas-based; Texas Instruments where
he proposed zero-based budgeting.
• In 1970, he presented the concept at Harvard Business Review
• In 1977, he published Zero Based Budgeting.
How it works?
Zero-based budgeting (ZBB) identifies irrelevant costs incurred by a business.
The ZBB method is applied along with other costing techniques—process costing,
unit costing, etc.
STEPS:
1. Begin budgeting with zero balance.
2. Decide the objective of budgeting.
3. Analyze business activities.
4. Study the budget components to determine the relevance of expenses, cost
reduction, and the scope for saving.
5. Prioritize the activities that need cost reduction.
6. Finalize a budget plan.
7. Prepare a report and convey roles, responsibilities, and activities to relevant
parties.
RP Corp. is a bag manufacturing company. RP Corp’s monthly Trading and P&L
A/c is as follows:
To improve the budget, the manager strategized the following:
The company doesn't require two people to work on a machine—salary
costs can be reduced by $300.
An unoccupied factory space can be sub-let to a zip manufacturing
partner—saving $400.
Social media advertising can replace banner ads to save another $40.
Many records can be maintained electronically to reduce the stationery
expenses by $12.
.
.
Zero-based budgeting
analyzes expenses
monthly, quarter, or year
to ensure every spending
habit is necessary and
provides a tangible
benefit, except for selfemployed individuals with
variable income.
Improves Coordination:
At ZBB, each department
has a role.
Collaborative decisionmaking allows for more
transparent
communication and
greater departmental
cooperation.
Profit Centric:
The budgeting strategy that
prioritizes cost efficiency,
effective resource allocation,
and eliminating unnecessary
expenses or prices.
Increases Efficiency:
The zero-based strategy lowers
errors since managers look for
superfluous
spending
and
operations.
Addresses Budget Inflation:
It does not use historical data
to construct the current
budget.
Instead, it considers real-time
data and eliminates
incremental planning
Profits
Overemphasized:
The ZBB system
directly impacts
budget items based
on their
profitability,
meaning that a
department with
low profits may
receive less
financing.
ZBB is a laborintensive process
involving
multiple
departments and
managers, with
data collection
and
interpretation
being timeconsuming.
Expertise: The
budgeting
method
requires a lot of
mathematical,
accounting, and
analytical skills.
Centralizes
Cost: Because it
concentrates on
cost reduction,
important goals
like as product
quality and
customer
service are
sacrificed.
Confusion:
When too
many
departments
and individuals
are involved,
contributions
are frequently
contradictory.
Zero-Based Budgeting is a strong cost-cutting approach that
allows firms to optimize resource allocation, increase
accountability, and align spending with strategic priorities.
However, successful implementation necessitates overcoming
obstacles like as resistance to change, greater workload, and
the dangers of short-term thinking.
To fully realize the promise of ZBB, businesses must take a
disciplined approach, invest in the appropriate technologies
and training, and cultivate a culture of transparency and
collaboration. By doing so, ZBB may revolutionize financial
management methods and position firms for long-term success
in a competitive environment.
THANK YOU