Question

Compare and contrast zero based budgeting and incremental (or base year) budgeting.

Answer 1

Zero based budgeting:- This is the process of preparing a budget from ZERO level. All the expenses and costs incurred are identified and analysed to the extent of their importance for companies operations/activities and then the budget is made.

In case of this budgeting, each and every activity of the management is verified from the scratch and it is checked whether the activity is worth the money of the company. The past year activities/operations are not taken as base for analysis.

Incremental (or base year) budgeting:- In this budgeting, the current year budget is used as a base to make budget for next year. It is assumed that all the departments will work at the same budgeted expenditure and only addition/reduction is done in the past year budget.

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S NO.	Zero based budgeting	Incremental (or base year) budgeting
	This is not used by every type of company	This method is used by maximum companies
	Impact of change cannot be seen immediately.	Impact of change can be seen immediately
	Past years budget is not taken as base	Past year budget is taken as base
	Huge innovation	Lack of innovation
	This is time consuming as prepared from scratch	This is not time consuming
	Not easy to prepare	Prepared easily
	Allocation of resources is done on the basis of importance of operations in the organization	No such importance based allocation is done in this budgeting
	Specialized skill is required to prepare such budgets	No specific skill is required to prepare this budget