Another type of budgeting which complements programme budgeting is zero-based budgeting. Zero-based budgeting differs from the traditional process in that it requires managers to defend their entire budget requests as opposed to the traditional budget approach, where managers are required only to justify the increased funding than the previous years.
The idea behind this technique is to divide enterprise programmes into “packages” consisting manpower and material goals, activities and the needed resources, and then to calculate costs for each package from the bottom up. By starting each programme budget from base zero, costs are calculated afresh.
It obliges the managers to develop, evaluate and rank alternative approaches in achieving the goal of the unit for which they are responsible.
Zero-based budgeting involves three basic steps. In the first step, management identifies:
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i. The objectives and goals of the functional unit
ii. The operational results required to achieve the stated goals
iii. Alternate approaches to achieve these goals
iv. The outcomes and resource requirements associated with each approach.
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In the second step, an evaluation of the approaches is carried out, by ranking of the alternatives, which in turn is based on cost-benefits or cost-effectiveness analysis.
In the third step, funding priorities are worked out by the management for each alternate approach, again based on cost-benefit or cost-effective analysis.
The initial ranking of expenditure alternatives is done at the level of managers responsible for specifying project parameters at the operational level. Thereafter, managers at successively higher levels of responsibility consolidate them and develop their own sets of priorities.
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Aggregating the subordinate’s recommendation into final rankings of expenditure alternatives for the institutions is finally decided at the highest management level.