As regards this last point, the decision package may be prepared at the base level, representing the minimum level of service or support needed to achieve the organisation’s objectives. Further incremental packages may then be prepared to reflect a higher level of service or support. For example, if ZBB was used by the ZY MD in our example above, may providing a service internally allow overtime or outsourcing the activity to an external provider. While some form of cost-benefit analysis may be useful at this stage, a degree of quantitative analysis must also be incorporated

2. Management will then rank all the packages in the order of decreasing benefits to the organisation. 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.
3. The resources are then allocated based on order of priority up to the spending level.

ZBB Benefits
The benefits of ZBB are substantial. 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:
1. Since ZBB does not assume that last year’s allocation of resources is necessarily appropriate for the current year, all of the activities of the organisation are re-evaluated annually from a zero base. Most importantly therefore, inefficient and obsolete activities are removed, and wasteful spending is curbed. This has got to be the biggest benefit of zero-based budgeting compared to incremental budgeting and was the main reason why it was developed in the first place.

2. By its nature, it encourages a bottom-up approach to budgeting in order for ZBB to be used in practice. This should encourage motivation of employees.
3. It challenges the status quo and encourages a questioning attitude among managers.
4. It responds to changes in the business environment from one year to the next.
5. Overall, it should result in a more efficient allocation of resources.

Drawbacks of ZBB
1. Departmental managers may not have the necessary skills to construct decision packages. They will need training for this and training takes time and money.
2. In a large organisation, the number of activities will be so large that the amount of paperwork generated from ZBB will be unmanageable.
3. Ranking the packages can be difficult, since many activities cannot be compared on the basis of purely quantitative measures. Qualitative factors need to be incorporated but this is difficult. Top level management may not have the time or knowledge to rank what could be thousands of packages. This problem can be somewhat alleviated by having a hierarchical ranking process, whereby each level of managers rank the packages of the managers who report to them.

4. The process of identifying decision packages and determining their purpose, costs and benefits is massively time consuming and costly. One solution to this problem is to use incremental budgeting every year and then use ZBB every three to five years, or when major change occurs. This means that an organisation can benefit from some of the advantages of ZBB without an annual time and cost implication. Another option is to use ZBB for some departments but not for others. Certain costs are essential rather than discretionary and it could be argued that it is pointless to carry out ZBB in relation to these. For example, heating and lighting costs in an organisation are expenses that will have to be paid, irrespective of the budget amount allocated to them. Incremental budgeting would seem to be more suitable for costs like these, as with building repair costs.

5. Since decisions are made at budget time, managers may feel unable to react to changes that occur during the year. This could have a detrimental effect on the business if it fails to react to emerging opportunities and threats.
6. The organisation’s management information systems might be unable to provide the necessary information.

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. State 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.

CONCLUSION
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 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.

Dr. Dada. MBA PhD CPFAcct. is a Finance / Management Consultant, Certified Professional Forensic Accountant ([email protected], 08052043855)