Zero Based Budgeting Emerged To Overcome The Limitations Of Incremental Budgets Accounting Essay
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Published: Mon, 5 Dec 2016
Zero-based budgeting emerged to overcome the limitations of incremental budgets. This approach requires that all activities are justified and prioritized before decisions are taken relating to the amount of resources allocated to each activity. Besides adopting a zero-based approach zero-base budgeting also focuses on programmes or activities instead of functional departments based on line-items which is a feature of traditional budgeting. Programmes normally relate to various activities undertaken by municipal or government organizations.
Zero-based budgeting works from the premise that projected expenditure for existing programmes should start from base zero, with each year’s budgets being compiled as if the programmes were being launched for the first time. The budgetees should present their requirements for appropriations in such a fashion that all funds can be allocated on the basis of cost-benefit or some similar kind of evaluative analysis. The cost-benefit approach is an attempt to ensure value of money, it question long-standing assumptions and serves as a toll for systematically examining and perhaps abandoning any unproductive projects.
That’s why more and more non-profit making organizations, including Oxfam Hong Kong, consider using Zero-based budgeting as an approach to judge a best solution of the organizations.
Background of Oxfam Hong Kong
Oxfam Hong Kong is one of non-profit making organizations. It is an independent international development and humanitarian organization working against poverty and related injustice. It recognized that much poverty is caused by injustice and that poverty alleviation requires economic, social and structural change. It worked with people facing poverty and with partner organizations on development, humanitarian, policy advocacy and public education programmes.
How zero-based budgeting could be used at Oxfam Hong Kong
Most organizations, including Oxfam Hong Kong, may use incremental budgeting system for their budgetary process. However, this approach has a serious drawback. The budgetary process for coming year usually uses previous budget allocation as a basis of allocation. That may incurred increase or decrease in budget for the coming year based on the budget allocation. It is because the percentage of allocation is without full examination of this allocation basis.
Incremental budgeting system assumes that the situation will continue in the same way. Zero-based budgeting could be used to remedy this serious drawback in incremental budgeting system.
The best suitable activities in Zero-based budgeting
To use zero-based budgeting as an approach, some activities are very suitable to use. For example:
Limited resource of labours
Oxfam Hong Kong is a non-profit making organization that it is always faced with limited resource of labours because major labours are volunteers that it often has not salaries. To organize an activity such as “donation of poverty countries”, it is a large project that it needs a lot of human resource. The allocation of resource is very important if the organization is faced with limited resource of labours. Zero-based budgeting can efficiently allocate resource of each department. Zero-based budgeting will define and evaluate decision packages of human resource and appropriate allocation by ranking of decision packages.
Judgment of consignment or in-house
Oxfam Hong Kong always creates a lot of activities about the donation of poverty countries. To encourage more donations, the organization always produces some souvenirs to donators. The souvenirs are also a part of cost that Oxfam Hong Kong will be considered to produce by consignment or in-house processing. It is because Oxfam Hong Kong would likely choose inexpensive method. It is very suitable to use zero-based budgeting to the identification. Although incremental budgeting system or activity-based budgeting can determine the cost of production by consignment or in-house processing, it only use department as a base which is less accurate than zero-based budgeting. It is because zero-based budgeting is based on activity which is more accurate than incremental budgeting system or activity-based budgeting.
The advantages of Zero-based budgeting
More and more non-profit organizations choose Zero-based budgeting rather than Incremental budgeting for their decision making because Zero-based budgeting has following advantages which Incremental budgeting is ignored.
Inappropriate activities are not undertaken
Traditional budgeting trends to extrapolate the past by adding a percentage increase to the current year. Zero-based budgeting avoids the deficiencies of incremental budgeting and represents a move towards the allocation of resources by need or benefit. Thus, unlike traditional budgeting the level of funding is not taken for granted. For example, when Oxfam Hong Kong has limited resource such as labour hour, the allocation of resources is being very important. Then Zero-based budgeting can help Oxfam Hong Kong to select the best solution of the allocation by ranking of decision packages. Finally, inappropriate solutions are not adopted.
The documentation of decision packages also leads to a deeper staff and management knowledge of all the operation and activities of the organization and can enhance communication, participation and therefore motivation. Oxfam Hong Kong can indirectly motivate the staff. It is because all departments especially management department in Oxfam Hong Kong need to communicate with other departments to make a consensus of the decision packages.
Concerning “value for money”
Zero-based budgeting focuses attention on outputs in relation to value for money. Through this “value for money” approach, inefficient and obsolete operations are identified so that wastage can be eliminated and a more efficient allocation of resources to activities and departments can be achieved. Therefore, Oxfam Hong Kong can indirectly reduce the cost of selection of decision because the wastage is reduced and the allocation of resource is being efficient.
Problem of Zero-based budgeting
Actually, no method is perfect. Zero-based budgeting also exists problems that Oxfam Hong Kong should be faced.
More costly and time consuming
The preparation of decision packages can generate a great volume of paperwork especially for a large project or activity and will require a considerable management skill. Therefore, Oxfam Hong Kong should be provided more training and education about concepts of application of Zero-based budgeting to the management department because Zero-based budgeting must be clearly understood by managers at various levels to be successfully implemented. The running cost is directly increased. Also, Zero-based budgeting will requires gathering, analysis and evaluation of large amounts of data that the management department faced with much workload and it is very time consuming.
Problems of identifying ranking packages
Subjective judgment and political pressure are unavoidable in ranking packages and allocation of resources and may create departmental conflicts. Different types and natures of activities across different departments, particularly with qualitative rather than quantitative benefits, may give rise to the problem of ranking. Oxfam Hong Kong is confused of the decision packages because it is difficult to define decision units and decision packages and sometimes subjective judgment is needed. Also, management may be exaggerated skews the results if it is unreliable. Then, the decision packages are became inaccurate.
Relationship between management and staff deterioration
The questioning attitude of zero-based budgeting is not always acceptable to staff or management because they may view it as a threat to their existing implied rights. For example, management department and accounting department have different ideas of decision packages. Each department does not agree with the other side ideas. The cooperation and motivation among the management and staff may deteriorate. Therefore, it may influence the relationship of each department in Oxfam Hong Kong.
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