Zero Based Budget

From traditional budget planning to zero-based budgeting (Relevant to PBE Paper II: Management Accounting and Finance) Dr Fong Chun Cheong, Steve, School of Business, Macao Polytechnic Institute Introduction A budget is an important financial plan that incorporates a systematic analysis and interpretation of financial forecasts in terms of products, markets and the application of resources. It requires managers to plan. It needs operational and financial resources information for decision making. More importantly, it sets a benchmark that can be used for subsequent performance measurement. Annual budget planning is conducted every year. When time passes, managers treat it as a regular practice and may fall into the habit of repeating a similar budget allocation and adjusting the figures slightly merely to account for inflation.

Traditional incremental budgeting Traditional budgeting uses the incremental approach. It begins with previous year’s budget and adjusts up or down from that budget to reflect changing assumptions for the new year. For instance, if previous year’s budgeted expenditures for a department were $1.8 million, the department may request a 4 percent increase ($72,000) to maintain the same level of service for next year. The justification for increased expenditure is the increased cost of inputs, such as materials and labour. This incremental approach may not incorporate a careful evaluation of the level of services being offered. Under the incremental approach, government unit managers often strive to spend the year’s entire budget, so there is no surplus at the year end. This acts to maintain the current budgetary level and to help the unit manager apply additional funds. For example, at a certain government department office in the New Territories, the officer-in-charge, Wong Kar Ming, was faced with the possibility of having surplus funds of around $150,000 at the fiscal year end. Kar Ming found methods to spend the extra money before the