Zero Base & Performance Budgeting - Budgetary control, Cost Accounting | Cost Accounting - B Com PDF Download

Recent trends in budgeting:

1. Zero Base Budgeting (ZBB): According to the official CIMA terminology, zero base budgeting is, “ a method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero” . Under ZBB the programmes and activities get evaluated and ranked from zero base as if these were launched for first time. In this technique of budgeting the unwanted projects and activities get dropped and wanted and desirable activities and projects get included in the budget.

Features:

a. It starts from zero

b. All activities are identified in appropriate decision packages

c. All programmes are considered totally afresh

d. A detailed cost benefit analysis of each programme is undertaken

e. There is an officer responsible for each decision packages

f. Priorities are established and decision packages are ranked

Advantages of ZBB

1. It considers every time alternative ways of performing the same job. It helps the management to get a critical appraisal of its activities.
2. It is helpful to the management in making optimum allocation of scarce resources
3. ZBB is particularly useful for service departments and Governments
4. It ensures active participation of managers in the budgeting process.
5. It promote high level of motivation at the level of unit managers
6. It focuses on output in relation to value for money.
7. It makes managers cost conscious and helps them in identifying priorities in the overall interest of the organization.

Difference between Traditional budgeting and ZBB 

Performance budgeting: - Performance oriented 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. The following matters will be specified very clearly in such budgeting

1. Objectives of the organization and for which funds are requested
2. Cost of activities proposed for the achievement of these objectives
3. Quantitative measures to measure the performance
4. Quantum of work to be performed under each activity.

Advantages of performance budgeting:

1. It improves budget formulation process
2. It enhances accountability of the executives
3. It facilitate more effective performance audit
4. It presents clearly the purpose and objectives for which funds are required

Practical Problems:

I. ABC Company Ltd .has given the following particulars. You are required to prepare a Cash budget for the three months ending 31^st Dec. 2010. 

Credit items are:-

1. Debtors/Sales – 10% sales are on cash basis, 50% of the credit sales are collected next month and the balance in the following month.

2. Creditors - - Materials 2 months

--Wages 1/5 month

-- Overhead ½ month

3. Cash balance on 1st October 2010 is expected to be Rs. 8,000

4. A machinery will be installed in August, 2010 at a cost of Rs. 1,00,000. The monthly Installment of Rs. 5,000 is payable from October onwards.

5. Dividend at 10% on preference share capital of Rs. 3,00,000 will be paid on 1 st December ,2010

6. Advance to be received for sale of vehicles Rs. 20,000 in December

7. Income tax (advance) to be paid in December Rs. 5,000.