*

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 Generally , budget is incremental
 As budget is prepared on the basis of increase or
decrease from amounts of previous period.
 But this is a technique where by each programme ,
whether new or existing must be justified entirely
each time when new budgets is prepared.(from
zero)
 ZBB prepares decision package. It consist goals,
activities &resources needed, cost. These all things
are calculated from zero.
 Zero base
Business unit
manager

Resources should
Value added Alternative
be allocated and
benefits will strategies
sanctioned to
accrue evaluated
activities

Current year’s
budget

Senior
management
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• the basic step of ZBB are as under

1) Determining the objective : the first step of ZBB is to

determine the objective for which budgeting is to be
undertaken. the objective may be to reduce office
overheads or to drop the projects which are not fruitful or
to increase the profitability of business by replacing it with
new more profitable activities.
2) Determining the extent to which ZBB be introduced : It is
not possible everytime to evaluate every activity of the
whole organisation. Hence it is necessary for top
management to decide whether ZBB should be introduced in
all areas or whether it should be restricted to a particular
section or activities of the organisation.
3) Identifying the decision units : decision units may be
any activity, programme or department in respect of which
cost benefit analysis is undertaken and in respect of which
proposal has been put forward by a manager for allocation
of funds. Every decision unit must be different from the
other decision units, so that it may be dropped from the
budget if found unprofitable. The decision unit must be
located at such place that it can be easily identified and
can be independently evaluated. It must be big enough to
be evaluated separately and must be small enough to be
administered efficiently.
4) Developing decision package : For preparing data related to
the proposals to be included in the budget, decision units
are to be identified. These are almost the cost centres of
the business. Decision packages are prepared on the basis of
such decision units. The necessary data is available from the
management accountant as well as from executive officers.
The decision as to the number of decision unit and packages
depends of the size of business unit and the goods dealt in.
The decision package must contain all the data which helps
management in deciding whether it is necessary for the
business, what would be the estimated costs and benefits
expected from it, whether the activity must be performed in
the way it is being performed at present or should it be done
in an alternative way or should it be dropped.
5) Evaluation of decision package and ranking : the decision
package are now evaluated on the basis of cost-benefit
analysis and ranks are given to them. Ranking is the basis of
deciding whether to include the proposals in the budget or
not. Each department manager evaluates the proposals and
initial ranking is done by him. It is then sent to the higher
official, the manager at this level is allowed freedom to
rank and select proposal upto a particular limit of outlay.
The proposals involving outlay exceeding the limits so
prescribed are then presented to the management on the
basis of results revealed by cost benefit analysis.
6) Allocation of funds : Taking into account the total funds to
be expended and the ranks given to various proposals, the
funds are allocated to the proposals, when available funds
are exhausted, the remaining proposals are dropped.
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1. Formulating decision package which defines activities, cost

& benefits.

2. Ranking activities & its units in order of priority.

3. Allocation of resources is made on the basis of priority.

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i. It permits management a higher degree of freedom & flexibility
in allocation of resources every year.
ii. The allocation is done more realistically by considering actual
performance.
iii. Facilitates a systematic ways of evaluating different operation &
programmes of management.
iv. Ensures every programme is essential for the organization & is
performed in best way.
v. Identifies areas where wasteful expenditure & suggesting
alternative course of action.
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I. It’s implementation is expansive & time consuming.

II. There may require lot of paper work.

III. There are lots of formulation problem for decision package.

IV. At the time of giving ranking to activities in order to priority, it is

quite difficult.