Performance Budget and ZBB Presentation On Performance Budget and ZBB By Manmohan Tiwari (Asst Prof, SBIT)

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 under- spending (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.