The zero base budget assumes that budget for the next period will be zero. It first analysis the need of the various department and then budget is allocated to them. Here are some of the advantages and disadvantages of zero based budgeting –
- It helps in forming the budget more rationally than traditional budget.
- Since resources are allocated from lower priority area to higher priority area it reduces the surplus expenditure.
- Enables the top management to better evaluate the performance of various department heads.
- It leads to better cost control among the various departments which in turn increases the efficiency of the whole organization as a whole.
- Zero based budgeting increases the overall communication and coordination within the organization and thus create a better environment in the organization.
- It requires more paper work and more personnel is needed which in turn increases the cost for setting up zero based budgeting system.
- It is more time consuming than traditional budgeting system and therefore it is resisted by various department heads.