It is only natural for companies to control production costs. When entering the final period, the Company will evaluate its finances to control expenses in the next period. One of the company’s efforts in controlling expenses is to make a non-residual budget or better known as zero-based budgeting . Then What is zero based budgeting ? Is it effective in shrinking the production burden? How are the applications and their benefits?
What is Zero-Based Budgeting ?
Before knowing what Zero-Based Budgeting is, you should know what budgeting is . Budgeting is the process of allocating some money to a number of resources in carrying out a program or activity in a certain period.
Zero-Based Budgeting (which is then abbreviated as ZBB) is a budgeting method based on the estimation of each activity without reference to the planned activities or results of activities in the previous period or in other words budgeting starts from zero. So that all allocations are arranged based on the vision and also the program plan in that period.
ZBB is usually used by business pioneers at the beginning of the period, event organizers , and also government agencies. ZBB is used in order to identify, plan and supervise programs or activities to increase effectiveness and efficiency. Usually companies use the ZBB method to cut certain costs that occur in the previous period.
The ZBB method was actually first carried out by the United States Department of Agriculture in 1962, but failed to apply because of the long process because in this method requires management decisions at the sub-departmental level. However, the ZBB method was actually published and first applied by the Texas Instruments company in 1969. At that time Peter A. Phyrr as Texas Instruments financial manager implemented Zero-Based Budgeting on the budget program that year.
Zero-Based Budgeting vs. Traditional Budgeting
Actually the difference in traditional budgeting ( Traditional budgeting ) with non-residual budgeting ( Zero-Based Budgeting ) is in the budgeting process. If the usual budgeting looks at the evaluation process activities in the previous period and adds points according to the evaluation, then the budgeting will not be left to allocate each activity starting from zero, without looking at the evaluation. More specifically, this is the difference between traditional budgeting and non-residual budgeting (ZBB)
| Traditional Budgeting | Zero Based-Budgeting | |
| Expenditure Period | Reference based on the previous period, factors that affect costs such as inflation are adjusted to reach the current year’s budget figures | The budgeting process starts from the bottom without having to analyze or evaluate activities in the previous period |
| Over inflation of budget | Managers can manipulate budget estimates | In ZBB it is difficult to practice over-estimation |
| Responsible | Top management | Management in each division |
| Orientation | accounting | decision |
| Approach | routine | Specific priorities and cases |
Also read: Getting to know the cash budget and how to arrange it
Zero-Based Budgeting Implementation Process
A true residual budget consists of a process of discussion of several management units in deciding the allocation of money to each resource. These processes are,
· Identification of decision units
The organizational or company structure must have a central responsibility. Each responsibility center consists of a decision-making unit. Decision units also involve the smallest level of decisions. The results of this decision will be the basis for ZBB budgeting.
· Decision Package Decision
Determination of the decision package can guarantee the availability of information for management. Decision package making is useful for providing a comprehensive picture of the parts to be budgeted and for individual evaluation. The decision package is made by the central manager and must show in detail the estimated cost of income expressed in terms of the acquisition of benefits.
There are two types of decision packages, namely:
- Mutually-Exclusive Decision Package . Namely the determination of packages that have similar functions. Determination of which package is more effective and profitable.
- Incremental Decision Package . Determination of different packages. The package is decided based on costs with different levels of effort in carrying out activities.
· Evaluation by Making Ranking Package Decisions
After determining the decision package, the next step is to rank the packages based on the benefits to the organization or company. This stage bridges the process of resource allocation among various activities.
Sample case
One example of a simple case in the implementation of a non-residual budget for example; You are a snack manufacturer and you usually hire graphic design personnel for promotional purposes. However, you feel that hiring graphic design personnel from outside is more expensive. Then you decide to recruit an internal graphic design workforce.
In this case, you have to set up a non-residual budget or zero-based budgeting because in the previous period you had never hired a graphic designer internally.
Advantages and disadvantages of Zero-Based Budgeting
ZBB budgeting has advantages and disadvantages depending on how you use the method in accordance with company conditions or the analysis conducted. The following advantages and disadvantages in implementing ZBB;
Advantages
- If done correctly it can improve budget efficiency, because in ZBB it has a more useful alternative package.
- ZBB places more emphasis on value for moneybudgets . That is, with this no-budget budget method, the decision makers can choose which part is more profitable.
- Each allocation can be reviewed because ZBB provides more detailed information.
- Increase knowledge and provide an analysis of the causes of employee motivation.
- Provide opportunities at bottom-level managementto participate in decision making.
Deficiency
- Too much time consuming
- ZBB tends to be used for short-term activities and is vulnerable to change.
- Companies or organizations need accurate technology because the decision package must be based on data.
- Vulnerable to mistakes, so management must continue to reviewand also rank .
- Vulnerable to fraud by unscrupulous companies or organizations.
Misunderstanding about Zero-Based Budgeting
Mckinsey explained that in fact people were wrong about the budget without a trace. The first mistake is that ZBB does not really overhaul or budget from scratch. But ZBB is an iterative process by analyzing certain posts to increase the effectiveness of activities.
The second mistake is that ZBB does not really cut the overall budget. But only in certain parts or certain management. For example the use of refrigerators to reduce electricity costs, stop using suppliers or vendors to streamline activities. The third myth is that ZBB does not always provide benefits to your business. All depends on the decisions made.
The fourth myth is ZBB not only for the post-post nature of sales or administrative matters. ZBB can cover all business activities. ZBB can be used in production, creative, marketing and also things that are used at the top management level.
Conclusion
Zero-based budgeting or zero-based budgeting (ZBB) is used to streamline a company’s activities. ZBB also does not mean budgeting activities from scratch but it is a lengthy review process to provide decisions that are able to influence business activities.
