What is the difference between zero based and performance budget

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While some form of cost-benefit analysis may be useful at this stage, a degree of quantitative analysis must also be incorporated. For example, cost-benefit analysis may show that the minimal level of provision for the school option 1 is the most cost-effective. However, this would present the school in a negative light to parents of potential pupils and would deter some parents from sending their children to that school. Consequently, more able students may be discouraged from applying, thus leading to poorer results which, in turn, could have a negative impact on the school's future funding.

Simple cost-benefit analysis would find it difficult to incorporate the financial effect of such considerations. This will help management decide what to spend and where to spend it. This ranking of the decision packages happens at numerous levels of the organisation. For example, in the case of the school, the catering manager will rank the numerous decision packages that he prepares. Then, the headmaster will rank the catering packages amongst all the packages prepared for the rest of the school.

They would have to be otherwise no organisation would ever go to the lengths detailed above in order to implement it.

These benefits are set out below:. It could be argued that ZBB is far more suitable for public sector than for private sector organisations. This is because, firstly, it is far easier to put activities into decision packages in organisations which undertake set definable activities.

Local government, for example, have set activities including the provision of housing, schools and local transport. Secondly, it is far more suited to costs that are discretionary in nature or for support activities. Such costs can be found mostly in not for profit organisations or the public sector, or in the service department of commercial operations. Since ZBB requires all costs to be justified, it would seem inappropriate to use it for the entire budgeting process in a commercial organisation.

Why take so much time and resources justifying costs that must be incurred in order to meet basic production needs? It makes no sense to use such a long-winded process for costs where no discretion can be exercised anyway. Incremental budgeting is, by comparison, quick and easy to do and easily understood.

However, the use of incremental budgeting indisputably gives rise to inefficiency, inertia and budgetary slack. In conclusion, neither budgeting method provides the perfect tool for planning coordination and control. However, each method offers something positive to recommend it and one cannot help but think that the optimal solution lies somewhere between the two.

Comparing budgeting techniques Incremental v ZBB. Incremental budgeting Incremental budgeting is the traditional budgeting method whereby the budget is prepared by taking the current period's budget or actual performance as a base, with incremental amounts then being added for the new budget period.

Benefits of incremental budgeting As indicated above, it is easy to prepare and is therefore quick. Since it is easy to prepare, it is also easily allocated to more junior members of staff. As well as being easy to prepare, it is easy to understand. Less preparation time leads to lower preparation costs. Prevents conflict between departmental managers since a consistent approach is adopted throughout the organisation. The impact of change can be seen quickly. Drawbacks of incremental budgeting It assumes that all current activities and costs are still needed, without examining them in detail.

In our school example above, we know that the head teacher has budgeted for two new language teachers.

How carefully has he looked into whether both of these new teachers are actually needed? With incremental budgeting, the head teacher does not have to justify the existing costs at all.

If he can simply prove that there is an increase in the number of language lessons equivalent to two new staff's teaching hours, he can justify the cost of two new teachers. By its very nature, incremental budgeting looks backwards rather than forwards.

While this is not such a problem is fairly stable businesses, it will cause problems in rapidly changing business environments. There is no incentive for departmental managers to try and reduce costs and in fact, they may end up spending money just for the sake of it, knowing that if they don't spend it this year; they won't be allocated the cash next year, since they will be deemed not to need it. Performance targets are often unchallenging, since they are largely based on past performance with some kind of token increase.

Therefore, managers are not encouraged to challenge themselves and inefficiencies from previous periods are carried forward into future periods. In our school example above, the head teacher may have hired an extra cook for the school kitchen when he thought that there was going to be greater demand for school dinners than there actually turned out to be. One of the cooks may be sitting idle in the kitchen most of the time but, with no-one looking at the existing costs, it is unlikely to change.

Time for change After World War II, when money was tighter than ever, the problems with incremental budgeting began to give rise to a feeling that change was needed. Zero-based budgeting With zero-based budgeting, the budgeting process starts from a base of zero, with no reference being made to the prior period's budget or actual performance.

Hilton Young advocated complete justification of every item requested in a budget. Department of Agriculture adopted a ground-up system of budgeting which is considered to be the first formal use of ZBB in the U. Carter was so enthusiastic about the system that, when he became President, he ordered all federal agencies to implement a ZBB system by Historical Development - ZBB The Ministry of Finance made it mandatory for all the administrative ministries to review their respective programs and activities in order to prepare expenditure budget estimates based on the principles of zero-base budgeting.

Can we not eliminate? Steps involved in ZBB 1. Identification of decision units. Analysis of each decision unit through development of decision packages. Evaluation and ranking of decision packages to develop the budget. Preparing the budget including those decision packages which have been approved. It can be described as a cost or a budget centre.

Managers of each decision units are responsible for developing a description of each programme to be operated in the next fiscal year.

For e. Defining a decision unit… Mutually exclusive — Contains alternative ways of doing a job. Incremental — Defining different levels of efforts Decision packages will have work packages Costs, returns, purpose, expected results, alternatives available, Consequences if activity is not performed or reduced.

Take a Decision Package: 1. Is the activity under our control. Recognize less effective activities. Validate — Arrangements Elimination 4. Make the activity profitable Thus , it is not suitable for an ordinary organization. To Conclude… Programs are ranked according to how well they align with the priorities.

This form of budgeting focuses on determining which services the government should offer in order to get the most value from the tax money. Hence, it too is a non incremental form of budgeting - an alternative to ZBB.

Program review is a planning method used to examine, outside of the budget process, how a program is provided. It can answer several important questions, for example: What services should we be in the business of providing? For those services we do offer, what level of service should we provide? Are we providing that level of service efficiently? Program review answers these questions outside the pressures of the budget process, and thus may be more successful than ZBB in finding real alternatives.

Rather, each decision unit is given a target spending amount for example, 90 percent of what was spent last year and is asked to submit a budget for that amount. The total target for the organization is necessarily less than what is affordable.

This is because the difference between the target and what is affordable is used to fund additional activities through decision packages. It uses systematic performance information indicators, evaluations, program costings etc to make this link.

A decision making— or allocation of scarce resources—problem is solved by determining which project maximizes efficiency and efficacy. Performance budgets hold agencies accountable for what they achieve Its fundamental starting point is maximum clarity about the outcomes which government is attempting to achieve, and about the relationship of outputs, activities and resources used to those desired outcomes. Organizations should develop strategic plans of what they intend to accomplish.

These plans should contain objectives based on outcomes that the public values. Appropriations are linked to organizations results; how well they are meeting their objectives as indicated by performance measures.

The Results Chain Examples of outputs include: medical treatments; advice received by farmers from agricultural extension officers; students taught; and police criminal investigations. Health inspections of restaurants are an output, the intended outcome of which is that fewer diners fall sick. Criminal investigations are a police output, and reduced crime the outcome. For example, school education aims to increase the level of education of the population.

But it also aims, amongst other things, to improve economic performance. Both a higher level of education and a stronger economy are outcomes. An indicator is representative to the degree to which it succeeds in measuring the dimension of performance which it seeks to measure.