Zero Based Budgeting is a method of budgeting in which all expenses must be justified for each new period. It aims to put the responsibility on managers to rationalize expenses and aims to drive value for an organization by optimizing costs and not just revenue. Traditional budgeting is a system of budgeting which depends on the accurate previous year’s spending to do the budgeting for the current year.
Difference between traditional budgeting and zero-based budgeting:
Following are the points of difference between traditional budgeting and zero-based budgeting:
Traditional budgeting is accounting oriented. Main stress happens to be on the previous level of expenditure. Zero-based budgeting makes a decision-oriented approach. It is very rational in nature and requires all programmers, old and new, to compete for scarce resources.
In traditional budgeting, the first reference is made to past level of spending and then demand inflation and new programmers. In zero-based budgeting, a decision unit is broken into understandable decision packages, which are ranked according to importance to enable to top management to focus attention to only on decision packages, which enjoy priority to others.
In tradition budgeting, some managers deliberately inflate their budget request so that after the cuts they still get what they want. In zero-based budgeting, a rational analysis, of budget proposals is attempted the managers, who unnecessarily try to inflate the budget request, are likely to be caught and exposed. Management accords its approval only to a carefully devised result-oriented package.
Traditional budgeting is not as clear and as responsive as zero-based budgeting is.
In traditional budgeting, it’s for top management to decide why a particular amount should be spent on a particular decision unit. In Zero-base budgeting, this responsibility is shifted from top management to the manager of the decision unit.
Traditional budgeting makes a routine approach. Zero-base budgeting makes a very straightforward approach and immediately spotlights the decision packages enjoying priority over others.