Traditional budgets allocate funds for future expenditures. They require managers to ensure that all organizational activities are adequately carried out within the allocated funds. Traditional budgets, therefore, focus primarily on the resources allocated to facilitate organizational activities. Zero-sum budgeting, also called zero-based budgeting, is an alternative to traditional budgeting that was first popularized in the 1970s. Unlike traditional budgets that emphasize only the financial aspects of a budget, zero-sum budgets focus on the outputs of the activities that are being budgeted for.
Definition and Explanation
The Chartered Institute of Management Accountants (CIMA) defines zero-sum budgeting as a “method of budgeting that requires all costs to be specifically justified by the benefits to be expected.” The budget starts with zero and allocates funds on the basis of the expected benefits that are to be derived from those funds. In other words, the budget starts from the results that are to be achieved and works backward to allocate required resources. The process starts with a specific account, such as delivery expense for a box company, for example, and then attempts to apply common sense for coming up with an optimal budget amount. For example, the budget accountant may assume that the company will deliver 1,200 boxes over the year, and average postage per box will be $2. The total zero-sum amount the accountant will allocate to delivery expense will be 1,200 multiplied by the $2 cost per box. This process is repeated for each department and account.
Peter Pyhrr, an American, conceptualized the zero-sum budgeting approach in 1973. Pyhrr went on to develop and implement zero-sum budgeting at Texas Instruments (TI) in Dallas, where he was then employed as a manager, and in the State of Georgia. The budgeting system was popularized when President Jimmy Carter pledged to use it to curb government spending in the 1970s.
Zero-sum budgeting is efficient and accurate in terms of resource allocation. It forces managers to justify the activities they plan to undertake, thereby eliminating slack, or the underestimation of revenues and the overestimation of expenses.
Zero-sum budgeting is time consuming, as budget makers must justify each budget item. The budgeting process is complex and requires considerable effort. Zero-sum budgets are resource intensive and expensive to implement organization-wide.
- Chartered Institute of Management Accountants (CIMA): Zero-Sum Budgeting Definition
- "Introduction to Health Care Economics & Financial Management”; Susan J. Penner; 2003
- "CIMA Official Learning System Fundamentals of Management Accounting"; Janet Walker; 2009
- The Economist: Zero Based Budgeting
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