COST AND MANAGEMENT

ACCOUNTING
LECTURE BY:
MR. DAMBARUDHAR KHODA (D.K)
ASSISTANT PROFESSOR
B.J.B. AUTONOMOUS COLLEGE
MARGINAL COST:

Marginal Cost is the additional cost incurred for

increase in one additional unit of output.
Marginal cost is nothing but the variable cost.
MARGINAL COSTING:
Marginal Costing is the method of ascertaining
marginal cost and it evaluates the effect of fixed
and variables costs on profit due to change in
volume of production.

Marginal Costing is also known as:

a) Contributory Costing
b) Variable Costing
c) Comparative Costing
FEATURES OF MARGINAL COSTING:

1.Only variable costs are charged to the cost unit. Fixed

costs are recovered from contribution.
2.All costs including semi variable costs are divided into two
parts, fixed and variable.
3.Closing inventories are valued at variable cost only.
4.Break-even Analysis and Cost-volume-profit Analysis are
integral parts of this costing technique.
ADVANTAGES OF MARGINAL COSTING:

1. It provides useful data for managerial decision- making.

2. It is a very effective tool of profit planning.
3. It facilitates control over variable costs.
4. Problems on computation of accurate fixed factory overhead rate
can be avoided as fixed overheads are charged against
contribution.
5. It provides the management with many useful techniques for
decision – making like Break – even Analysis, etc.
LIMITATIONS OF MARGINAL COSTING:
1. It assumes the semi- variables costs can be segregated into
two parts, fixed and variable elements. In practice, however,
such segregation of semi-variable costs is very difficult.
2. It excludes fixed cost for decision – making, which sometimes
may lead to wrong conclusion.
3. It fails to reflect the impact of increased fixed costs due to
development of technology on production costs.
4. Variable cost technique cannot be successfully applied in
“Cost plus contract”.
DECISION MAKING AREAS OR USES OF
MARGINAL COSTING:
1.Fixation of Selling price
2.Decisions relating to most profitable product mix
3.Acceptance or rejection of a special offer
4.Decisions relating to make or buy
5.Retaining or replacing a machine
6.Expanding or Contracting
ABSORPTION COSTING:
Under Absorption Costing Technique, both variable cost and
fixed costs are charged to cost units.
Under Absorption Costing Technique, fixed cost is treated
as product cost.
In other words, the cost of a finished unit in inventory will
include direct materials, direct labour, and both variable and
fixed manufacturing overhead.

Absorption Costing is also known as:

a) Full Costing
b) Full Absorption Method
MARGINAL COSTING VERSUS ABSORPTION
COSTING

The main difference between marginal costing and

absorption costing is that in marginal costing,
variable cost is treated as product cost, and fixed cost
is treated as period cost.
On the other hand, in absorption costing, variable
and fixed costs are treated as product costs.
COST-VOLUME-PROFIT ANALYSIS:

It is a technique that may used by the management to

evaluate how costs and profits are affected by changes in
the volume of business activities.
As a result of change in operating conditions or change in
economic environmental factors, the value of and the
relationship among these variables also change.
Cost-Volume-Profit analysis is the analysis of three
variables i.e., cost, volume and profit.
OBJECTIVES OF C-V-P ANALYSIS:
a) It helps to forecast profit fairly and accurately;
b) It acts as an effective tool of profit planning to the management;
c) It helps in ascertaining break-even point of the product produced
and sold.
d) It is very much useful in setting up flexible budget;
e) It assists the management in the process of performance
evaluation for the purpose of control;
f) It helps in formulating price policies by projecting the effect of
different price structures on costs and profits.
ASSUMPTION OF CVP ANALYSIS:

a)Total cost consists of two components – fixed cost and

variable cost;
b)Selling price per unit remains constant at different volume
of sales;
c) Only one product is sold by the concern or if it sells
multiple product, the sales mix remains constant at
different volume of sales;
d)Volume of production is equal to the sales volume.
ELEMENTS OF CVP ANALYSIS:
1.Marginal Cost Equation: It exhibits the relationship
between the contribution, fixed cost and profit. It explains
that the excess of sales over variable cost is the
contribution towards fixed cost and profit, i.e. S – V = F +
P.
2.Contribution: It is the excess of sales over variable cost,
i.e., C = S – V or C= F + P
3.Profit – Volume Ratio Or P/V Ratio: It is the ratio of
contribution and sales. It is generally expressed in
percentage. It exhibits % of contribution included in sales,
i.e. P/V Ratio = C/S x 100.
4.Break-even Point: It is that level of sales where there is no
profit or no loss. At break – even point, total sales revenue
is equal to total cost.
Any sales above this BEP, a concern earns profit,
whereas any sales below this BEP, the concern suffers loss.
But as there is no profit or loss at BEP, Contribution
from sales at BEP is available towards fixed cost only, i.e.
at BEP, C = F.
5. Margin of Safety: It is the level of sales made above the
break – even point. In other words, Margin of Safety is
the excess of actual sales over BEP sales.
C-V-P VERSUS BREAK EVEN POINT

CVP Analysis refers to the study of the effect on profit

due to changes in cost and volume of output
whereas BE Analysis refers to the study of
determination of that level of activity where total
sales is equal to the total cost and also the study of
determination of profit at any level of activity.
BREAK – EVEN CHART:

It is the graphical presentation of Break – even

Analysis. It depicts the relationship between costs,
sales and profits.
Break Even Chart graphically shows the profit or
loss at various levels of activity and also shows the
level of activity where there is no profit no loss (i.e.
total cost equals total sales)
ANGLE OF INCIDENCE

Angle of Incidence is the angle formed by intersection

of sales line and total cost line at break – even point
in the break – even chart. This angle exhibits the rate
at which profits are being earned by a concern after
reaching the break – even point.
It shows the profit earning capacity of a concern.
Wider angle of incidence exhibits higher profit
earning capacity of the concern or vice – versa.
METHODS OF COSTING:

1.Job Costing
2.Contract Costing
3.Process Costing
4.Service Costing
JOB COSTING:
Job Costing refers to the method of ascertaining costs where
product is manufactured or service is provided against
specific order, as distinct from continuous production for
stock and sale.
Under this method, costs are collected and recorded for
each job, or a batch of similar jobs, under a separate
production order number. Each job has its own
characteristics and needs special treatment.
APPLICATION OF JOB COSTING:
Job costing may be usefully employed in the following organizations:
a) Printing Press: Each item to be printed, whether it is a handout, a book
or an advertising flyer, is a separate job.
b) Garage : Each car to be repaired or tuned up becomes a separate job.
c) Furniture Manufacturer: Each order for furniture is treated as an
individual job.
d) Service Organization stations : A firm of Chartered Accountants is an
example of a service Organization. Each work-order assigned by the
client is treated as a separate job and fees charged accordingly.
e) Construction Companies: Each building is a separate job because each
building has different covered area and a different design.
JOB COSTING PROCEDURE:
A concern using job costing usually adopts the following procedure
for costing purposes:
1. Estimating the job costs: It is useful for submission of tenders and
price quotations. The Costing Department must prepare an
estimate of the total cost for each job before it is undertaken.
2. Allocating job order number: As soon as an order is received and
accepted, it must be assigned a separate job order number.
3. Preparing production order: If the job is accepted, a production
order is made out by the Planning Department.
4.Collecting and recording costs : The costs are collected
and recorded for separately. A job cost sheet is used for
recording and summarizing the cost of materials, labour
and overheads applicable to each job.
5.Comparing actual costs with estimated costs: On
completion of a job, a completion report is sent by the
Production Shop to the Costing Department.
CONTRACT COSTING:

In contract costing each contract is treated as a cost unit

and costs are ascertained separately for each contract.
It is suitable for business concerned with building or
engineering projects or structural or construction contracts.
Usually, there is a separate account for each contract.
The contract account is debited with all direct and
indirect expenditure incurred in relation to the
contract. It is credited with the amount of contract
price on completion of the contract. The balance
represents profit or loss made on the contract and is
transferred to the profit and loss account.
In case, the contract is not completed at the end of
the accounting period, a reasonable amount of profit,
out of the total profit made so far on the incomplete
contract, may be transferred to profit and loss
account.
DISTINCTION BETWEEN JOB AND CONTRACT
COSTING
Under job costing, the cost is first allocated to cost centres and then to
individual jobs. In contract costing, most of the expenses are of direct
nature, overhead forms only a small percentage of total expenditure.
Under job costing pricing is influenced by individual conditions and
general policy of the organisation. Under contract costing, pricing is
influenced by specific clauses of the contract.
Unlike job costing, each contract is a cost unit in contract costing.
Under contract costing, the work is usually carried out at a site
other than contractee’s own premises. Job costing is often applied
where jobs are carried out at the contractee’s own premises.
RECORDING OF TRANSACTIONS OF CONTRACT
COSTING
1. Material: Materials may be purchased in bulk and kept in store for
supply to the contract, as and when required, or these may be
purchased and directly supplied to the contract. If any materials are
transferred from one contract to another, their costs would be adjusted
on the basis of Material Transfer Note, signed both by the transferor
and transferee foreman.
2. Labour: All labour employed on the site is regarded as direct labour
irrespective of the nature of the task performed by the labour
concerned. Each person would be provided with a job card upon which
he must record the nature of the work performed by him. On the basis
of the analysis of the job cards, labour analysis sheets are prepared for
ascertaining the actual cost of labour on different operations.
3. Direct expenses: The expenses which can be directly charged to
different contracts will be posted directly to the respective contracts.
These include cost of special tools, cost of design, electric charge,
insurance etc.
4. Plant used in a contract: The value of plant used on a contract may be
either debited to the contract and the written down value thereof at
the end of the year entered on the credit side for closing the contract
account, or only a charge for use of the plant (depreciation) may be
debited to the account.
5. Overhead expenses: In contract, overhead expenses are few and relate
only to works or administration expenses which cannot be directly
apportioned to individual contracts. These indirect expenses may be
distributed on several contracts as a percentage of cost of materials or
wages paid or the prime cost.
6. Extras: Where some additional work not stipulated in the contract is
carried out, the expenditure on this additional work should be
separately analysed from that charged to the main contract.
7. Sub-contracts: Generally work of a specialised character e.g., the
installation of lifts, special flooring etc. is entrusted to other contractors
by the main contractor. The cost of such sub-contracts is a direct charge
against the contract for which the work has been done.
8. Escalation clause: Escalation clause is usually provided in the contract
as a safeguard against any likely changes in the price or utilisation of
material and/labour. This clause provides that in case prices of items of
raw materials, labour etc. specified in the contract change during the
execution of the contract, beyond a specified limit over the prices
prevailing at the time of signing the agreement, the contract price will
be suitably adjusted.
9. Cost plus contract: Cost plus contract is a contract in which the value of
the contract is ascertained by adding a certain percentage of profit over
the total cost of the work. This is used in case of those contracts whose
exact cost cannot be correctly estimated at the time of undertaking a
work. The profit to be paid to the contractor may be a fixed amount or
it may be a particular percentage of cost or capital employed.
10.Progress payment, Retention money and Architects’ certificate: in
case of large contracts the system of progress payment is adopted. The
contractee agrees to pay a part of the contract price from time to time
depending upon satisfactory progress of the work. The progress will be
judged by the contractee’s architect, surveyor or engineer who will
issue a certificate stating the value of work so far done and approved
by him. Such work is termed as work certified.
11.Profit on incomplete contracts: Profits on incomplete contracts should
be considered, of course, after providing adequate sums for meeting
unknown contingencies. There are no hard and fast rule regarding
calculation of the figures for profit to be taken to the credit of profit
and loss account.
12.Work-in-Progress: In contract accounts, the value of work-in-progress
includes the amount of work certified and the amount of work
uncertified. The work-in-progress account will appear in the assets side
of the balance sheet. The amount of cash received from the contractee
and reserve for contingencies will be deducted out of this amount.
PROCESS COSTING
Process costing is that aspect of operation costing which is
used to ascertain the cost of the product at each process or
stage of manufacture. This method of accounting used in
industries where the process of manufacture is divided into
two or more processes.
The objective is to find out the total cost of the process
and the unit cost of the process for each and every process.
Usually the industries where process costing used are
textile, oil industries, cement, pharmaceutical etc.
CHARACTERISTICS:
1. The process cost centers are clearly defined and costs relating to each
process cost center are accumulated.
2. The stock records for each process cost center are maintained
accurately i.e., units introduced in the process or received from the
preceding process and also units passed to the next process.
3. The total costs of each process are averaged over the total production
of that process, including partly completed units.
4. The cost of the output of one process is the raw materials input cost of
the following process.
5. Appropriate method is used in absorption of overheads to the process
cost centers.
6. The process loss may arise due to wastage, spoilage, evaporation etc.
7. Since the production is continuous in nature, there will be closing work-
in-progress.
NORMAL WASTAGE, ABNORMAL WASTAGE
AND ABNORMAL GAIN
❑ Normal Loss: This is the loss which is un-avoidable because of the nature of raw
materials and is inherent in the normal course of production. Such loss can be
estimated in advance. The normal loss is recorded only in terms of quantity and the
cost per unit of usable production is increased accordingly.
Where the scrap possesses some value as a waste product or as raw material
for an earlier process, the value there of is credited to the process account. This reduces
the cost of normal output and process loss is shared by usable unit.
❑ Abnormal Loss: Any loss caused by unexpected or abnormal conditions such as sub-
standard materials, carelessness, accident or loss in excess of the margin anticipated
for normal process loss is regarded as abnormal process loss. Abnormal loss is
expected to arise, when operation are carried on inefficiently.
Units representing abnormal loss are valued like good units produced and the
value of abnormal loss is debited to a separate account, which is known as abnormal
loss account.
❑Abnormal Gain: If the quantum of loss is less than the determined
percentage of normal loss, the difference is called abnormal gain
or effectives. The presence of abnormal effectives should not
affect the cost of goods units in the normal circumstances. The
value of abnormal effective is debited to the concerned process
account.
APPLICATIONS OF PROCESS COSTING

1.Identical Products Industries

2.Industries with Multiple Departments
3.Industries with Interchangeable Parts
4.Industries with Varying Product Features
5.Innovative Industries
SERVICE COSTING/ OPERATING COSTING
Service costing is a method of costing whereby the cost of
providing service per unit is calculated. Here it may be
remembered that cost unit is different from service to service
e.g. a ton per kilometre or a passenger per km in case of
transport undertakings, a bed per patient per day in hospitals,
kw hours or h.p. hours in case of electricity or number of meals
in a hotel.
There are simple cost units and composite cost units. In
simple cost unit, unit is obvious e.g. per student, per kilometre,
per bed etc. In composite unit more than are unit is combined
e.g. per passenger – kilometre, per tonne – kilo metre.
COST CLASSIFICATION
Costs in service department are classified into : -
1. Fixed Costs: This type of cost do not change either increase or decrease
of production or services rendered. For example, in case of transport
service: salaries of drivers, conductors, office staff etc.,
buildings/garage rent, insurance, transport licence, taxes, etc., these
costs are termed as Standing Charges.
2. Semi-Variable Costs: If the costs are increased or decreased with a
change in the volume of services rendered but not in the same
proportion as the change in the volume of services are termed as Semi
Variable Costs.
3. Variable Costs: If the costs are increased or decreased in direct
proportion to change in the volume of services rendered are termed as
Variable Costs. These costs are termed as running costs or Operating
Costs or Maintenance costs. For example, tyres, petrol/diesel/CNG,
repairs lubricating oil, painting, servicing, depreciation etc.
CHARACTERISTICS:
1. Unique Services : the undertaking offer unique services to their
customers.
2. Investment : In undertakings offering services have to invest large
proportion of their capital in fixed assets. In case of railways, for
example, the investment is made in laying down the track, build
stations and in engines, bogies etc.
3. Less Working Capital : As compared to other undertakings, those
offering services require less working capital.
4. Operating Costs : The operating cost is divided into fixed, semi
variable and variable costs. It is very important to fix the unit cost.
BUDGET

“A budget is a financial and/or quantitative statement,

prepared prior to a defined period of time, of the policy to
be pursued during that period for the purpose of attaining a
given objective.”
In other words, “Budget is a statement of income and
expenditure of a certain period”.
FEATURES OF BUDGET
1. A Budget must be expressed either in quantitative form i.e.,
the number of units of different products or it may be
quantitative and financial form i.e., the number of units and
rupees of each product etc.,
2. It must be prepared before the time for which it is required.
3. Budget must be prepared for a definite period.
4. Budget must be prepared in accordance with the policies of
the business enterprise.
5. Budgets are prepared normally for attaining organisational
objectives.
OBJECTIVES OF THE BUDGET
1. A budget is a blue print for the desired plan of action. Since
budgets are prepared in accordance with the policies of
various functions of the organization these will be helpful as
plan of action to discharge the various functions.
2. Budgets are useful for forecasting the operating activities and
financial position of a business enterprise.
3. Budgets are helpful in establishing divisional and
departmental responsibilities.
4. Budgets provide a means of coordination for the business as a
whole.
5. Budget ensures good business practice because they plan for
future.
6.Budgets are means of communication. The complex plans
that are laid down by the top management are to be
passed on to the operative personnel.
7.Budgets are devised to obtain more economical use of
capital and all other inputs.
8.Budgets are more definite assurance of earning of the
proper return on capital invested.
9.Budgets facilitate centralized control with delegated
responsibilities and authorities.
LIMITATIONS OF BUDGETS:
1. Budgets fail if estimates are not accurate
2. Risk of Rigidity: But in the modern business world, which is more
dynamic in nature, such rigidity will create problems.
3. Budgeting is an expensive process: The installation and
implementation of the budgeting process involves too much time
and costs. Therefore small organisations can not afford to it.
4. Budgeting is not a substitute for management: Budgeting is only a
tool for management. Installation of Budgeting system does not
relieve the managers from their duties.
5. Continuous monitoring is required
BUDGETING

Budgeting is the complete process of designing,

implementing and operating budgets. The main
emphasis in this is short-term budgeting process
involving the provision of resources to support plans
which are being implemented.
BUDGETARY CONTROL
Budgetary control is defined as “the establishment of budgets
relating the responsibilities of executives to the requirements of
a policy and the continuous comparison of actual with budgeted
results, either to secure by individual action the objective of that
policy or to provide a basis for its revision.”
A budgetary control system secures control over performance
and costs in the different parts of a business:
(i) by establishing budgets
(ii) by comparing actual attainments against the budgets; and
(iii)by taking corrective action and remedial measures or revision of
the budgets, if necessary.
 OBJECTIVES OF BUDGETARY CONTROL
1. To use different levels of management for achievement of the
objectives of the firm.
2. To facilitate centralised control with delegated authority and
responsibility.
3. To achieve maximum profitability by planning income and
expenditure through optimum use of the available resources.
4. To ensure adequate working capital in other resources for efficient
operation of business.
5. To reduce losses and wastes to the minimum.
1.To bring out clearly where effort is needed to remedy the
situation.
2.To see that the firm is not deflected from marching
towards its long-term objectives without being
overwhelmed by emergencies.
3.Various activities like production, sales, purchase of
materials etc. are co-ordinated with the help of budgetary
control.
CLASSIFICATION OF BUDGETS
FUNCTIONAL BUDGET
Budgets for a period are really classified according to the various activities in the
organisation. All activities are interrelated. The forecasts for individual activities
are prepared and co-ordinated with those of other activities and then
consolidated to show the total effect of all the activities as a whole. Approved
targets for individual functions are known as “functional budgets”
The consolidation of all functional budgets is known as the “Master Budget”.
1. Sales Budget: The sales budget is a forecast of total sales, expressed in terms
of money and quantity. Sales forecasts are influenced by a variety of factors,
external as well as internal. External factors include general business
conditions, Government policy, etc. Internal factors consist of sales-prices,
sales trend, new-products, etc.
2. Production Budget: The production budget is a forecast of the production for
budget period. The main steps involving in the preparation of a production
budget are production planning; consideration of capacity; integration with
sales forecasts, inventory-policies, management’s overall policies.
3. Production Cost Budget: It may be further classified as under:
i. Materials Budget: Materials requirement budget, commonly known as
materials budget, assist the purchase department in suitably planning the
purchases, fixing the maximum and minimum levels of materials,
components etc.
ii. Labour Budget: The labour content of each item of production as per the
production budget is determined in terms of grades and trades of the
workers required and the labour time for each job, operation and
process. The rates of pay, allowances, bonus, etc., of each category are
then considered and labour cost to be set for each budget centre is
calculated
iii. Plant Utilisation Budget: Plant Utilisation Budget is prepared for the
estimation of plant capacity to meet the budgeted production during the
budgeted period. It is a forecast of plant capacities available for fulfilling
production requirements as specified in the production budget.
4. Overhead Budget: It may be further classified as under:
i. Manufacturing Overhead Budget: The following steps are required to
be taken up to prepare the manufacturing overhead budget:
a) Classification of expenditure
b) Departmentalisation of expenditure
c) Determining the level of activity for setting the overhead rates
d) Establishing the variable overhead rates per unit of production or productive
hour
ii. Selling and Distribution Budget: The selling expenses include all items
of expenditure on the promotion, maintenance and distribution of
finished products. This budget which is closely related to the sales
budget is the forecast of the cost of selling and distribution, for the
budgeted period.
5. Research and Development Budget: This depends mostly on management
decisions regarding the research and development effort - the projects
already in hand and the proposed projects.
6. Financial Budget: It may be further classified as under:
i. Cash Budget: Cash forecast precedes a cash budget. A cash forecast is an
estimate showing the amount of cash which would be available in a future
period. This budget usually of two parts giving detailed estimates of (i) cash
receipts and (ii) cash disbursements.
A cash budget can be prepared by any of the following methods: (i) Receipts and payments
method (ii) Adjusted profit and loss account method (iii) Balance sheet method.
ii. Capital Expenditure Budget: Capital expenditure budget is the plan of the
proposed outlay on fixed assets and is very closely related to the cash
budget. Capital expenditure forecasting is a continuous process and by
nature it is a long-term function. Capital forecasts should be made for a
number of years.
MASTER BUDGET
A master budget is the summary budget incorporating its component
functional budget and which is finally approved, adopted and
employed. It is the culmination of the preparation of all other
budgets like the sales budget, production budget, purchase budget
etc. It consists in reality of the budgeted profit and loss account, the
balance sheet and the budgeted funds flow statement.
The master budget is prepared by the budget committee on the
basis of co-ordinated functional budgets and becomes the target of
the company during the budget period when it is finally approved.
In the master budget, costs are classified and summarised by
types of expenses as well as by departments. This information
extends the range of usefulness of master budget.
BASED ON EFFICIENCY

i. Fixed budget
ii.Flexible budget
FIXED BUDGETS
A fixed budget is a budget designed to remain unchanged
irrespective of the level of activity actually attained. A fixed
budget is one which is designed for a specific planned
output level and is not adjusted to the level of activity
attained at the time of comparison between the budgeted
and actual costs.
Obviously, fixed budgets can be established only for a
small period of time when the actual output is not
anticipated to differ much from the budgeted output.
FLEXIBLE BUDGETS
It is a budget prepared in a manner so as to give the
budgeted cost for any level of activity. It is a budget which
by recognizing the difference between fixed, semi-fixed and
variable cost is designed to change in relation to the activity
attained.
The main characteristic of flexible budget is that it shows
the expenditure appropriate to various levels of output. If
the volume changes the expenditure appropriate to it can
be established from the flexible budget.
BASED ON CONDITION

i. Basis budget
ii.Current budget
i. BASIC BUDGETS: Basic budget has been defined as a
budget which is prepared for use unaltered over a long
period of time. This does not take into consideration
current conditions and can be attainable under standard
conditions.
ii. CURRENT BUDGETS: A current budget can be defined as a
budget which is related to the current conditions and is
prepared for use over a short period of time. This budget
is more useful than basic budget, as the target it lays
down will be corrected to current conditions.
BASED ON TIME

i. Long term budget

ii.Short term budget
i. Long term budget: Though there is no exact
definition of long term budget, yet we can say
that a budget prepared covering a period of
more than a year can be taken as long term
budget. Of course, it may be for 3 years, 5 years,
10 years and even 20 years etc.,
ii.Short term budget: It is a budget prepared for a
period covering a year or less than a year.
BASED ON NATURE OF EXPENDITURE AND
RECEIPT

i. Capital budget
ii.Revenue budget
i. Capital Budget: It is a budget prepared for
capital receipts and expenditure such as
obtaining loans, issue of shares, purchase of
assets, etc.,
ii. Revenue Budget: A Budget covering revenue
receipts and expenses for a certain period is
called Revenue Budget. Examples: Sales, other
incomes, purchases, administrative expenses
etc.,
ZERO BASE BUDGETING
Zero base budgeting, may be better termed as “De nova
budgeting” or budgeting from the beginning without any
reference to any base-past budgets and actual happening.
Zero base budgeting may be defined as “a planning and
budgeting process which requires each manager to justify
his entire budget request in detail from scratch (hence zero
base) and shifts the burden of proof to each manager to
justify why he should spend any money at all”.
FEATURES OF ZERO BASE BUDGETING
i. Concentration of efforts is not simply on “how much” a
unit will spend but “why” it needs to spend.
ii. Choices are made on the basis of what each unit can offer
for a specific cost.
iii.Individual unit’s objects are linked to corporate targets.
iv.Quick budget adjustments can be made.
v. Alternative ways are considered.
vi.Participation of all levels in decision-making.