The budget can be understood as the process of creating a budget, which is nothing more than a quantitative state of income and expenses, created and approved, for a specific period, to be followed during that period, with the objective of achieving the objective. There are two types of budgeting techniques: traditional budgeting: objectives set in the previous year, budgeting is done through certain additions and deductions, to reach the current budget and zero-based budgeting. No reference is made to the previous year. objectives
The traditional budget incorporates the expense of the previous year in the new budget proposal and only the increases are a matter of debate. On the other hand, the zero-based budget is based on the assumption that each rupee of expenditure must be justified.
In the article presented to you, make a brief description of the differences between traditional and zero-based budgets, read.
Content: Traditional budget Vs Zero base budget
- Comparative graph
- Key differences
|Sense||The traditional budget refers to a technique for preparing the budget, which is based on the budget of the previous year.||Zero-based budgeting means a budgeting method, whereby each time the budget is established, activities are reassessed.|
|It focuses on||Previous level of expenses||New economic valuation.|
|Orientation||Accounting Oriented||Decision or project oriented.|
|Justification||No justification of the current project is required.||Justification of current and proposed projects is required, considering the benefits and costs.|
|Justification Authority||High management is given by high management for the particular decision unit||The manager of the particular decision unit gives the justification.|
|Priority||Mainly at the level of past spending, then the demand for inflation and new programs.||The decision unit is divided into comprehensive decision packages and classified according to their relevance.|
|Clarity and responsiveness||lower||Comparatively higher|
|Focus||Routine approach||Direct focus|
Definition of traditional budget
Traditional budgeting is a budgeting method that depends on traditional cost accounting, in the sense that it is based on the allocation, distribution and absorption of overhead costs on products.
The budget uses an incremental approach, in which the current year's budget is prepared with the help of the previous year's budget, that is, when making adjustments up or down in the budget of the previous year, to show the changing trend for next year. The expenses for the new year are adjusted according to the inflation rate, consumer demand, market conditions, etc.
Zero Base Budget Definition
The zero-based budget, as the name suggests, is the budget technique that requires the preparation and explanation of each budget from scratch. It is a method in which all activities are reevaluated, each time the budget is created. It is created without making any reference to past previous budgets and the actual event.
In simple terms, it is the budgeting technique in which the cost component needs a specific justification, as if the activities related to the budget will be carried out for the first time. Therefore, the burden of proof lies with the manager to explain the reason for spending money on a particular activity and also explain what the consequences will be if the proposed activity is not carried out and money is not spent. In the absence of approval, the budget allocation is zero.
The zero-based budget requires that activities be evaluated in decision packages, which are measured by systematic analysis and classified according to their importance.
Key differences between the traditional budget and the zero-based budget
The fundamental differences between the traditional budget and the zero-based budget are given below:
- The traditional budget refers to the planning and budgeting process in which the previous year's budget is taken as the basis for preparing a budget. On the other hand, zero-based budgeting is a budgeting technique, whereby, each time the budget is created, activities are reassessed and, therefore, started from scratch.
- The traditional budget emphasizes the level of previous spending. On the contrary, the zero-based budget focuses on making a new economic proposal, provided that the budget is established.
- The traditional budget is oriented towards accounting, since it works on the basic principles of cost accounting. Against this, the zero-based budget process is decision-oriented.
- In the preparation of the traditional budget, justification of the existing project is not required. In contrast, in the zero-based budget, justification of the existing and proposed project is required, taking into account cost and benefit.
- In the traditional budget, the decision as to why a certain amount is spent on a decision unit is made by senior management. Unlike zero-based budgets, the decision regarding the expense of a specific sum in a decision unit is that of the managers.
- In the traditional budget, the main reference is made at the level of previous spending, followed by the demand for inflation and the new programs. In contrast, in the zero-based budget, a decision unit is divided into decision packages that are of an integral nature and then assigned a priority according to their relevance, to facilitate senior management to concentrate only on decision packages , which others have preference.
- When it comes to clarity and responsiveness, the zero-based budget is better than the traditional budget.
- Traditional budgeting follows a routine approach, while zero-based budgeting follows a direct approach.
One of the main drawbacks of the traditional budget is that managers deliberately escalate the proposed budget so that, despite the elimination, they can easily achieve what they want. On the other hand, the zero-based budget implies an exhaustive analysis of the budget proposal and, therefore, if managers make immaterial adjustments to achieve what they want, they are probably exposed.