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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
Solution
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
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
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