21.

11 Zero Base Budgeting (ZBB)

21.11.1 ZERO BASE BUDGETING
Zero base budgeting is defined as an operative
planning and h'rdgeting process which requires each
4gs F I N A N G I A I. MANAGEME [{,I
tr

manager to justify his entire budget in details from responsible.

serateh (hence, zero base) and shifts the burden of 3. Rank the alternatives in order Dr'
proof to each manager to justify why he should their contribution toward the frrnr,s,
speird any money at all" objectives.
?"erc base budgeting is defined as a method of 4. Fund the alternatives according ili,u;

budgeting which requires each cost element to be the ranking established in steE l:
sp*eifiealtry justified, as though the activities to until the avaiLable funds are exhaustei
which the budget re].ates were being undertaken
fcr the first time withor-rt approval the budget
aliowance i.s rero.
21 "1 T"3 OBJECTIVES OF ZERO BAS;E
BUDGETING SYSTEM
Xn traditional budgeting, existing expenditure
leve}s form the base line for f,uture expenses. 1. To justify the resource requireEEirrffilxrll
En the traditional approach, the focus of its for the present as well as for rrnnrw
atte ntion is sinnp ly the j ustification of any activities.
Froposed increases in that expenses. The 2. To establish for all managerial level" &s ,mr
tr*jection of this base line is a starting point objective against which accomplishmerr; $nu
fCIr uero base budgeting. This approach requires all be identified and m,easured.
activiti.ee to be justified and prioritized before the
3. To assess alternative mgthods of ach.:e"r'rw
decision to devote resources to a particular one is
the objectives"
taken.
4. Zewbase budgeting emphasizes that fltw&rururl
Alt activities are subjected to the most basic resources should be ranked on the h,,R;mn rilff
scrutiny and" answers sought to such fundarnental
cost benefit analysis. It is a top-r',"i/rmriuurunr,
questions as:
approach of budge g. It requr.r*:;s ;llMtm,,

h) Should the activity b,e undertaken participation of managers at all levelo lr ilfilllm,
at all? organization.
(il If the co any undertakes the activity, how
mueh should be done and how well should
it be done?
21 .7tr"4 ADVANTAGES OF ZERO ts,AGi I

'r' BUDGETING
i*t
/ !
How should the activity be performed; in
krause or sub'contract? G) It provides a basis for assessrng nerruummr
@) F{ow rnuch would the various alternative packages on the basis of cost-l.:e,wrtfiffi
levels of senrice and provision cost? analysis.
T'his form of budget is an overaltr reuiew of the (il It reduces inefficiency and obtar-ns r 'hmillilhr
tetal expenditure with a view to justify his entire level of effectiveness.
budget, from base zero. G) It can be fruitfully utilized in priv&,r,* rmildr
governrnent organizatiofls, as w-e]- rffi ruull
*$.fttr"?, UBB'$ PROCESS profit' making and non'profit m,.e-fl;;;mryi
organizatiorrs"
Fellowing is the fourstep process to a 7,BB @ It can be applied for cost red.;,ffirunuml
exes.*ise I
programmes"
1' Deterrnine the activities which are to be G) It eRsures a totally complete asse,s,simffimmmi
used., and identifu the manager responsible of every function or activity.
foe" tFre $ame.
lllustnatlon t
2" Request the nrlanager identified in step-L to A department of Parshwa Traders attains s,&re unr ;ffi,
prepare a number of alternative solutions 6,00,000 at 80 per cent of its Rormal capacrti mmrrm rilllhi
for individual activities for which they are expenses are given below:
BUDGETS AND BUDGETARY CONTROL SYSTEiI 427

General expenses 1 per cent of sales

Adnninistration costs: Rs.
Distribution costs: Rs"
Office salaries 90,000
Wages 15,000
General expenses 2 per cent of sales
Rent 1 per cent of sales
Depreciation 7,500
Other expenses 4 per cent of sales
Rates and taxes 8,750
Selling costs: Rs.
Salaries I per cent of sales Draw up: Flexible administration, sellinE and distribution
cost budget, operating at 90%, 100% and fiAoft of normal
Traveling expenses 2 per cent of sales
capaci$.
Sales office expenses 1 per cent of sales
Solution
Flexible Budget of Parchwa Traders
Expenses Basis 80% 90% 1 00% 11fio/a
Rs. Rs. Rs. Rs.
(1) (2',) (3) (4) (5) (6)

Sales 6,00,000 6,75,000 7,50,000 8,25,00CI

Administration costs:
Office salaries Fixed 90,000 90,000 90,0CI0 90,00#
General expenses 2o/o of sales 12,000 13,500 15,000 16,500
Depreciation Fixed 7,500 7,500 7,500 7,5CI#
Rates and taxes Fixed 8,750 8,750 8,750 8,7sCI
Total administration costs 1,18 ,250 1,19,750 1,21 ,230 1,22,750
Selling costs:
Salaries 8o/o of sales 48,000 54,000 60,000 66,000
Traveling expenses 2o/a of sales 12,000 13,500 15,000 16,500
Sales office expenses 1o/a of sales 6,000 6,750 7,500 8,250
General expenses 1o/o of sales 6,000 6,750 7,500 s,25CI

Total sellinq costs

Distribution Costs:
Wages Fixed 15,000 15,000 15,000 15,00G
Rent 1 o/o
of sales 6,000 6,750 7,500 8,25G
Other expenses 4 olo of sales 24,000 27,000 30,000 33,000
Total distribution cost: 45,000 48,750 52,500 56,250
Total Admn. Selling and Dist. Cost 2,35,250 2,49,500 2,63,750 2,78,00S

ln the absence of any information, it has been lllustration 2

med that office salaries, depreciation, rates and taxes,
wages remain the same at 110% level of activity.
, in practice, some of these costs may change, if
illization of capacity exceeds 100%.
Production capacity of Trupti Tools at 100% is 1 ,00,000 units.
Prepare a flexible budget al7lo/o and 90% capacity level
from the available records for the two levels at 60% and
80% capacity utilization.
0o/o 80o/o

Output in units 60,000 90,000

Cosfs. Rs. Rs.
Direct materials 1,80,000 2,40,000
Direct vvages 2,40,000 3,20,000
Direct expenses 30.000 40.CI00
Prime cost 4,50,000 6,00,000
Cverheads
$alaries 25,000 25,000
Gonsumable stores 12,000 16,000
Fcnner & Fuel 7,000 9,000
 FINANCIAL MANAGEMEh
lndirect labour 6,000 7,000
Repair and maintenance 4,000 5,000
lnsurance 2,000 2,000
lnspection wages 1,200 1,600
Depreciation 8,000 8,000
Total overheads 65,200 73,600
Total Factory cost 5,15,200 6,73,600

Solution

Flexible Budget of Trupti Tools

Particulars / Production capacity 60% 70o/o 80o/o 9C
t,
Output units 60,000 70,000 80,000 90.c::
Rs. Rs. Rs.
Direct materials 1,80,000 2,10,000 2,40,000 2,70 4--'.
Direct wages 2,40,000 2,80,000 3,20,000 3,60 C,:
Direct expenses 30,000 35.000 40.000 45 C::
Prime cost 4,50,000 5,25,000 6,00,000 6,75 C: :
Variable overheads
Consumable stores 12,000 14,000 16,000 18.C: :
lnspection wages 1,200 '1,400 1,600 1.8--
Total variable overheads 13,200 15,400 17,600 19.t::
Semi-v aiable ove rheads
Power and fuel 7,000 8,000 9,000 10 c:,:
lndirect labour 6,000 6,s00 . 7,000 7 5_'_

Repairs & maintenance 4,000 4,500 5,000 5.5:,:

Total semi-variable overheads 17,000 20,000 21,000 23 4-:
Fixed overheads
Salaries 25,000 25,000 25,000 25.C-_ _

lnsurance 2,000 2,000 2,000 2C-.-

Depreciation 8,000 8,000 8,000 8 C::
Total fixed overheads 35,000 35,000 35.000 35 C::
Total Factory costs 5,15,200 5,95,400 6,73,600 7,52 e-.

As the numbers of expenses are given, it is advisable The variable cost changes with changes in the c-: -
to segregate the expenses into variable, semi-variable and level. The same procedure applies for all other semi-va-.=:,-
fixed expenses. This directly helps to have a very scientific items.
flexible budget.
Working notes: Power and fuel at 80% Rs. 9,000 lllustration 3
at 60% Rs. 7,000
Change in 20o/o Rs. 2,000
From the following details, you are required to pre--
For 10% change in the activity level, changes cost bv (a/ Production budget for products X,Y, Z.
Rs. 1,000. Composition of cost, say, at 60% capacity is:
(b) Purchase budget for direct materials for the a:,: -
Variable Rs. 6,000
three products.
Fixed Rs. 1,000
Total Rs. 7,000
 ]GETS AND BUDGETARY CONTROL SYSTEM 429

>roducts Budgeted Material Rate per kg Labourhour Rate per

units for the consumption per unit direct labour
year per unit hour
X 50,000 6kg Rs. 5.00 3 Rs.2.00
40,000 10 kg Rs.6.50 4 Rs.2.20
z 60,000 8kg Rs.4.50 t) Rs. 1.50
The expenses have been forecasted as follows: Packing cost @ 3% of direct material cost.
rarticulars Rs
rdrrect wages 6,20,000
Cther employment cost 5,00,000
Repairs and maintenance 7,00,000
Power and fuel 3,10,000
Rent, rates, etc. 70,000
nsurance 50,000
)epreciation 1,50,000
!r'liscellaneous factory expenses 2,50,000
The following additional information is to be given effect:

Particulars
Finished goods:
Cpening stock (units) 2,000 5,000 8,000
Closing stock required (in units) 5,000 4,000 6,000
Raw materials:
Opening stock (kg) 15,000 40,000 70,000
Closing stock required (in kg) 20,000 30,000 40,000

lc, ution
Production Budget (Quantity in units)
Particulars / Products

Sales 50,000 40,000 60,000

Add; Closing stock (FG) 5,000 4,000 6,000
Less: Opening stocks (FG) 2,000 5,000 8,000
Production budget (A) 53,000 39,000 58,000

Materlal Consumption Budget

Particular/Products X
Ivldsid req.ir€d per rcdrC (in lO (Bt 6 10 I
Tdd Ay. (Rqrred in lgD 19 = (Ax g 3,18,000 3,90,000 4,64,000
Price per kg (Rs.) 5 6 4.50
Value of materials for production
budgets (Rs. in lakh) 15.90 23.40 20.88
430 FINANCIAL MANAGEII:*
Direct Labour Budget

Particular / Product
Production units 53,000 39,000 58,000
LabOLr hours per unit 3 4 6
Total labour hours 1,59,000 1,56,000 3,49,000
Rate per hour (Rs.) 2.00 2.20 1.50
Total(Rs. in lakh) 3.18 3.43 5.22

Purchase Budoet
Particular / Product
TotalQty. Required as per 3,18,000 3,90,000 4,64,000
(C) above in kg
Aod Closing stock 20,000 30,000 40,000
Less: Opening stock 15,000 40,000 70,000
Purchase Qty. in kg. 3,23,000 3,80,000 4,34,000
Price per kg (Rs.) 5.00 6.00 4.50
Value for purchase budget
(Rs. in lakh) 16.15 22.80 19.53

Productlon Budget (Rupees in lakh)

Particular / Product Total X Y
jz
Rs. Rs. Rs. Rs.
DM refers to Mat. Cons. Budget 60.18 15.90 23.40 20.88
DL (refers to Direct labour budget) 11.83 3.15 3.43 5.22
Packing cost 3% of DM 1.81 0.46 0.70 0.63
lndirect wages 6.20
Other employment cost 5.00
Repairs and maintenance 7.00
Power and fuel 3.10
Rent, rates, etc. 0.70
lnsurance 0.50
Depreciation 1.50
Misc. factory expenses 2.50
Totalfactory costs 100.32