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

mpact of change can be seen !uic"ly

Disadvantages of Cost-based

#o incentive to develop new ideas

#o incentive to reduce costs

May become out of date

$romotes spending up to "eep budget

levels consistent

$riority 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 ustified in its entirety each
time a new budget is developed.
Zero-based Budgeting

%e!uires managers to start at &ero for each budget period and

'ustify every input and output when developing the budget

Ma'or Steps in the $rocess

(efinition of the Mission and )oals of the *rgani&ation

dentification of Cost Centers

+nalysis of Each Cost Center

%an"ing of Cost Centers and Evaluating +lternatives

+cceptance and +llocation of %esources

Budget $reparation

Monitoring and Evaluation

Effective and Efficient Use of %esources to +chieve )oals

Advantages of Zero-based

,ustified spending

dentifies %edundancies

-ocuses use of resources

#ew and old pro'ects are compared

Elimination of waste
Disadvantages of Zero-based

Costly and complex

.oss of long-term planning

,udging and $rioriti&ing may become political

May not be as useful in manufacturing

Cost-based vs Zero-based
Budgeting
Cost-based Zero-based
Starting Point $rior period/s costs 01211
Focus +dding to and subtracting
from last year/s budget
Evaluating each
business activity
Additions Changes in inflation ndividual business
activities3 pro'ects3
contracts3 and
expenses
Subtractions Cuts from what was
expected
#4+
Purpose To 'ustify perceived needs
and specify the
associated costs
of those needs
To 'ustify and prioriti&e
all business activities
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. oney is often allocated in lump sums rather than line!

item budgets, giving managers the flexibility to determine how best
to achieve results.

Is inclusive. "t involves policyma#ers, 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. &y recognizing the relationship

between strategic planning and resource allocation, performance
budgeting focuses more attention on longer time horizons.
!erformance Budgeting
Performance Budgeting
Advantages

'orward planning is enhanced

(lear appreciation of ongoing cost of pursuing government ob)ectives

&etter management practices with the comparison of ob)ectives with

achievements

&etter public disclosure

"mproves the accountability of government in general and the public

services in particular
Disadvantages

*ationalizing the irrational +or highly political, process

(omplete rationality involves listing of all available alternative ways in

which money could be spent