Performance Budgeting
Introduction:
Performance budget is also a recent development
which tries to overcome the limitations of traditional
budgeting.
In traditional system of budgeting is used in business
enterprises and government departments.
The main defect is that the control of performance in
terms of physical units and costs is not achieved,
because in such budgeting money concept is given more
importance.
 Performance budgeting is a relatively a new concept
which focuses on the functions, programmes and
activities.
In other words, In case of traditional
budgeting both input and output are mostly
measured in monetary units.
Performance budgeting lays emphasis on
achievement of physical targets.
Performance budgets are established in such
a manner that each item of expenditure
related to a specific responsibility centre is
closely linked with the performance of that
centre.
It tries to answer questions like, what it is to
be, How it is to be, when it is to be achieved?
The govt of India has now decided to introduce
performance budgeting in all its departments
in a phased manner.
Example: Performance budgeting in govt
system of accounting may be that generally
expenditure is classified under the heads like
pay & allowances, transportation, repairs and
maintenance etc.
In PB the classification of expenditure may be
setting up of a steel mill, construction of roads
and railway station,computerisation of railway
booking.
When work on these activities is started funds
are obtained against these physical targets.
Reports are then prepared for any underspending (or) over- spending which are then
analyzed for corrective action to be taken.
PB is sometimes called programme budgeting
(or) planning, programme budgeting system
(PPBS)
Steps in Performance Budgeting
Establishment of responsibility centre
• It establishes a segment where mgr is held
responsible for the performance.
Establishment of performance targets
• Targets are set to be achieved, Units sold and
produced.
Estimation of financial requirement
• Financial support needed to achieve the target.
Comparision of actual with budgeted .
Reporting and action.
Zero Base Budgeting (ZBB)
Introduction:
ZBB is a recent development in the area of
management control system and is steadily
gaining importance in the business world.
Before preparing a budget a base is determined
from which the budget process begins.
Current years budget is taken as the base or
the starting point for preparing the next years
budget and figures in the base are changed as
per the plan for the next year.
This approach of preparing a budget is known
as Conventional (or) Incremental budgeting
because it is mainly concerned with the
increases or changes in the operations likely to
occur in the budget period.
Example: Sales of the current years budget
may be taken as the base and next years
budget for sales will be current years.
The main draw back is it identifies the past
inefficiencies.
ZBB is an alternative to Incremental budgeting.
ZBB was introduced in Texas, USA in 1969 by
Peter phyrr who is known as the father of ZBB.
 It is not based on incremental approach and
previous years figures are not taken as the
base for preparing next years budget instead
the figures are developed with Zero as the
above which means that budget is prepared as
if it being prepared for a new company for the
first time.
Definition of ZBB:
According to “CIMA” London: ZBB is defined as
a method of budgeting where by all activities
are revaluated each time a budget is set.
Discrete levels of each activity are valued and
a combination is chosen to match funds
available.
Features of ZBB:
All budget items both old and new are considered
totally a fresh.
Amount to be spent on each budget item is to be
totally justified.
A detailed cost benefit analysis of each budget
programme is undertaken and each programme
has to compete for scare resources.
Department objectives are linked to corporate
goals spend.
Uses of ZBB:
ZBB is used now a days widely. In fact when
jimmy carter became the president of USA he
directed that all federal govt agencies adopt
ZBB.
In a review, it was proved that many
organizations used ZBB has led to
considerable improvements in the budget
process.
ZBB tries to locate those activities which are
not essential.
In the same it was not proved successful in
many organizations.
Advantages of ZBB
In ZBB all the activities included in the budget
are justified on cost benefit considerations
which leads to promote effective allocation
of resources.
ZBB discards the attitude of accepting the
current position in favour of an attitude of
questioning and challenging each item of
budget.
In the course of ZBB process inefficient and
loss making operations are identified and
may be removed.
It adds Psychological push to employees to
avoid wasteful expenditure.
It is an education process and can promote a
management team of talented and skillful
people who tend to promptly respond to the
changes in the business environments.
Cost behavior patterns are more closely
examined .
Deliberately inflated budgets requests get
automatically weeded out in the ZBB process.
Dis-advantages of ZBB
ZBB leads to an enormous increase in paper
work and results in high cost of preparing
budgets every year.
Managers may resist new ideas and changes.
They may feel threatened by ZBB because all
the expenditures are questioned and need to
be justified.
In ZBB there is danger of emphasizing short
term gains at the expense of the long term
benefits.
It has tendency to regard any activity not
foreseen and sanctioned in the most recent
ZBB as illegitimate.
For introducing ZBB managers need to be
given proper training and education
regarding this new concept its pros and cons
and new implementation.
It may not always be easy to properly rank
decision packages and this may give rise to
conflicts.