Today every large scale organization is required to follow the cost benefit approach to overcome the deficiencies of incremental budgeting.Zero base budgeting(ZBB) can play a vital role to apply cost benefit approach because it focuses only necessary activities to achieve organzation objectives.Therefore it is also called as Priorty base budgeting.
This approach requires that all activities are justified and prioritized before decisions are taken relating to the amount of resources allocated to each activity.In ZBB approach, projected expenditure for existing programmes should start from base zero with each years budget being complied as if the programmes were being launched for the first time.
Prior to the introduction of ZBB, the budget allocation available to each cost centre and budget holder were based on an incremental budgeting system which meant that past histories of spending patterns determined current resources allocation.It was anticipated the increased budget involvement would make it difficult to justify historical based allocation.
ZBB involves the following three stages:
- A description of each organizational activity in a decision package, - The evaluation and ranking of decision packages in order of priority, - Allocation of resources based on order of priority up to the spending cut off. Decision package means operation of particular programme with incremental packages reflecting different level of effort that may be expended on a specific function.
Benefits of ZBB:
-It avoides the deficiencies of incremental budgeting & represent a move toward the allocation of resources by need or benefit. -It creates questioning attitude rather than one that assume that current practice. -It focuses attention on outputs in relation to value for money.