Approaches to Budgeting

• Top-down approach
– Upper management prepares budgets
and passes them down to individual
departments

• Bottom-up approach
– Each department supplies the data and
passes them up to the next level of
management
 Advantages of Cost-based
• Budget is stable
• Change is gradual and planned
• Managers can operate on consistent basis
• System is simple and easy to understand
• Impact of change can be seen quickly
Disadvantages of Cost-based
• No incentive to develop new ideas
• No incentive to reduce costs
• May become out of date
• Promotes spending up to keep budget
levels consistent
• Priority for resources may have changed
since the budget was originally set
 Zero Base Budgeting
Zero Based Budgeting implies that managers need to
build a budget from the ground up, building a case for
their spending as if no baseline existed- to start at
zero.

The purpose of ZBB is to re-evaluate and re-examine

all programs and expenditures for each budgeting
cycle by analyzing workload and efficiency measures
to determine priorities or alternative levels of funding
for each program or expenditure. Through this
system, each program is justified in its entirety each
time a new budget is developed.
 Zero-based Budgeting
• Requires managers to start at zero for each budget
period and justify every input and output when
developing the budget
• Major Steps in the Process
– Definition of the Mission and Goals of the Organization
– Identification of Cost Centers
– Analysis of Each Cost Center
– Ranking of Cost Centers and Evaluating Alternatives
– Acceptance and Allocation of Resources
– Budget Preparation
– Monitoring and Evaluation
• Effective and Efficient Use of Resources to Achieve
Goals
 Advantages of Zero-based
• Justified spending
• Identifies Redundancies
• Focuses use of resources
• New and old projects are compared
• Elimination of waste

Disadvantages of Zero-based
• Costly and complex
• Loss of long-term planning
• Judging and Prioritizing may become political
• May not be as useful in manufacturing
 Cost-based vs Zero-based
Budgeting
Cost-based Zero-based

Starting Point Prior period’s costs $0.00

Focus Adding to and subtracting Evaluating each
from last year’s budget business activity
Additions Changes in inflation Individual business
activities, projects,
contracts, and
expenses
Subtractions Cuts from what was N/A
expected
Purpose To justify perceived needs To justify and prioritize
and specify the all business activities
associated costs
of those needs
 Performance Budgeting
Performance budgeting is a system of planning, budgeting, and
evaluation that emphasizes the relationship between money budgeted
and results expected.

Performance budgeting:
• Focuses on results. Departments are held accountable to certain
performance standards. There is a greater awareness of what services
taxpayers are receiving for their tax dollars.
• Is flexible. Money is often allocated in lump sums rather than line-
item budgets, giving managers the flexibility to determine how best
to achieve results.
• Is inclusive. It involves policymakers, managers, and often citizens
in the budget “discussion” through the development of strategic
plans, identification of spending priorities, and evaluation of
performance.
• Has a long-term perspective. By recognizing the relationship
between strategic planning and resource allocation, performance
budgeting focuses more attention on longer time horizons.
 Performance Budgeting
Advantages
• Forward planning is enhanced
• Clear appreciation of ongoing cost of pursuing
government objectives
• Better management practices with the comparison of
objectives with achievements
• Better public disclosure
• Improves the accountability of government in general
and the public services in particular
Disadvantages
• Rationalizing the irrational (or highly political)
process
• Complete rationality involves listing of all available
alternative ways in which money could be spent