Zero Base Budgeting Using the Balanced Scorecard

Seminar Paper, 2005

35 Pages, Grade: 2,3



1 Introduction

2 Zero Base Budgeting (8349)
2.1 The Concept of Zero Base Budgeting
2.1.1 Introduction
2.1.2 Steps of Zero Base Budgeting
2.2 Advantages of Zero Base Budgeting
2.3 Disadvantages of Zero Base Budgeting
2.4 Conclusion

3 Brief overview of the BSC as a management system (15075)
3.1 Reasons for developing the BSC
3.2 Key concepts of the BSC
3.2.1 Translate strategy into action
3.2.2 Performance drivers and indicators
3.2.3 Cause-and-Effect Relationships
3.2.4 Double-loop-feedback and strategic learning
3.3 The four perspectives
3.3.1 The financial perspective
3.3.2 The customer perspective
3.3.3 The internal business perspective
3.3.4 The learning and growth perspective

4 Zero Base Budgeting using The Balanced Scorecard (8349)
4.1 Construct of ZBB and BSC
4.1.1 Implementation of BSC (Top-Down)
4.1.2 Implementation of ZBB (Bottom-Up)
4.2 Feedback and Conclusion

5 Evaluation of ZBB using the BSC (15075)
5.1 Criteria for an optimal planning process
5.2 Analyzing the proposed concept with the criteria
5.2.1 Controlling measures
5.2.2 Alignment with organizations objectives
5.2.3 Allocation of (limited) resources
5.2.4 Feedback, Evaluation and Surveillance
5.2.5 Strategic and operational decision-making-process
5.2.6 Adopting environmental uncertainties and flexibility
5.2.7 Performance and Motivation
5.2.8 Communication and Participation
5.2.9 Creativity

6 Final remarks


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1 Introduction

The Planning Process itself is often defined differently across companies. One company might think of it as encompassing everything from strategy development to operational planning and quarterly forecasting, to management reporting and performance scorecards. For another company, it might be nothing more than developing departmental budgets once a year. The real purpose of planning (which companies can easily lose sight of) is to improve decision making. But not only decision making is of interest, there are other questions that need to be answered, for example how to handle overhead costs, create more efficiency and effectiveness in the company, through an optimized communication process. In this term paper, two completely different procedures, namely Zero base budgeting and the Balanced Scorecard are analyzed. The first two chapters deal with the attributes of BSC and ZBB. A typical course of actions for both procedures is illustrated and analyzed. Subsequently advantages and disadvantages of both operations are elaborated and a conclusion is drawn. Zero base budgeting is a bottom-up process, which means it starts at bottom and ends at the top(-management). The Balance Scorecard is top-down procedure, which is exact the opposite. At first view, therefore a combination of BSC and ZBB appears to be logical and perfect matching. The schedule of this construct, where ZBB is combined with the BSC, is performed in chapter four. Both ZBB and BSC feature lacks, because every single procedure of the two focuses on a specific assignment and neglects other important aspects. The question is, can the lacks of ZBB and BSC compensate each other, so that finally a procedure is generated, which unites the positive attributes of both processes. In order to analyze and judge the construct of “ZBB using the BSC”, different criteria are defined in chapter five, and the construct is being judge by these criteria, which represent attributes, a successful strategic, tactical and operational planning system should fulfil. In the end, a final conclusion is drawn, if it is possible to unite ZBB and BSC and to generate a procedure, whose benefits generally considered lies above its costs.

2 Zero Base Budgeting (8349)

2.1 The Concept of Zero Base Budgeting

2.1.1 Introduction

Zero Base Budgeting was created by Peter A.Pyhrr, a manager of the company Texas Instruments, during the 1970s. It was used in free-market enterprises, as well as in governmental institutions. Zero base simply means, that a company’s budget starts from base zero, disregarding trends or historical levels of expenditure, which is in sharp contrast to the incremental budgeting system in which in general, a new budget tends to start with a balance at least equal to last year's total balance, or an estimate of it. Every manager is forced to give detailed reasons for his budget and justify every single expenditure, in order to show why several expenditures are necessary and to reallocate resources from less efficient departments of a company to the more efficient ones. The main aims of ZBB are the verification of costs and benefits, reduction of overhead costs and the optimal distribution of resources in reference to operational and strategic objectives. In the majority of cases, ZBB is applied to service and support areas of a company, rather than to production areas, because service and support areas tend to have a bigger part of overhead costs compared to production areas. Overhead costs are difficult to handle, because they cannot be attached to one single cost unit and its hard to prove inefficiency in departments of a company, that tend to have high overhead costs. Because of the fact, that Zero base budgeting is a quite expensive and time consuming procedure, it’s not conducted every year. To implement ZBB in a company, a time period of about 4,5 months and of course an additional insert of resources are required[1]. Therefore ZBB is not recommendable for enterprises, who find themselves in a financial crisis.

2.1.2 Steps of Zero Base Budgeting

In order to accomplish ZBB in a company, there are several steps that need to be followed (according to the prevailing opinion[2] ):

First of all the management of a company has to deal with the question: What are our main objectives and can we develop sub-objectives for each division that fit to our main goals? To answer this question, it has to be considered that finally costs and benefits are the result of management decisions. Therefore ZBB starts with the generation of so called decision packages. A decision package is a plan or budget for each project or departmental plan, which identifies costs, alternatives, estimated return and purpose of decision units plus consequences to the company, if the appropriate decision units are not performed.[3] An example for a decision unit is a cost center.

In the second step the manager has to express aims for the department he is responsible for and point out how these aims can be achieved through different alternatives. According to these aims (for example: the purchasing department has the aim to buy raw materials at the lowest price possible) different proficiency levels are defined. The proficiency level is the amount and the quality of the work result of a decision unit [4]. Three proficiency levels can be distinguished:

The minimum operating level represents the operating level, with the lowest costs and input of production factors. At this level a further restriction could lead to serious troubles in the manufacturing process of a company. The present operating level simply represents the current “status quo”. The desirable operating level is the highest one and covers everything the manager wishes to realize for this decision unit. Of course all three proficiency levels must undergo a cost/benefit analysis. Generally speaking the lowest operating level produces the lowest costs and the highest one produces the highest costs.

The third step deals with the ranking process of the decision packages. The main aspect here is to compare costs and benefits of each decision package against others. Three different hierarchy levels can be distinguished. The bottom level is the department manger level, followed by the head of department level and the highest level is the occupied by the top management of the company. The ranking process starts at the bottom level and ends at the top level (Bottom-up)[5], due to the fact that just too many decision packages exist and it would be inefficient, if the ranking process was done by the top management alone. Generally all packages are ranked in order of decreasing benefit and are classified into three groups (for example: Group A, B, C). As aforementioned the department manager is the first link of the chain and decides, which packages must be realized (these packages are put into Group A), which packages are desirable (they represent Group B) and which packages are “phantasmagoric” (that is the content of Group C). In all three groups, the proficiency level has to be appointed as well. Afterwards, the packages are passed on to the head of department, who has a wider overview concerning the operation schedule, whereas the department manager has more detailed information about his own department. The head of department can use the rankings of the department manager as guides but has to create a decision package ranking by himself. In the last step the ranking process reaches the top management, where the decision packages are finally ranked and approved or rejected. After the ranking process is completed, all costs for the approved decision packages are summed-up and compared to the available budget of the company. This budget forms a so-called “cutoff-line”, above which all ranked packages are put into effect, packages below are rejected.

2.2 Advantages of Zero Base Budgeting

Zero base budgeting is a powerful supervision and control tool[6]. It can be implanted in economic enterprises as well as in governmental agencies[7].Lets see why, by taking a look at the advantages of ZBB. On the basis of the procedure, that the budgeting process starts at zero and every expenditure must be justified, inefficiency is clearly discovered and transparency is raised. Therefore resources can now be reallocated across different departments, which has positive effects on efficiency and the reduction of overhead costs. ZBB promotes the overview over the enterprise, because all managers are forced to give clear details about the aims of the different departments derived from the aims of the company. Due to the fact, that all hierarchy levels are involved in the ranking process of the decision packages, this could lead to positive effects on the cooperation between all management levels and an improvement of communication, teamwork and information exchange now and for future problems. The operating detail produced by lower and middle management is a useful working guide during the budget year. The documentation also gives senior management an in-depth knowledge of the company’s operations.[8] As aforementioned the creation of decision packages includes different alternatives of decision units. This procedure allows the company to react very fast, because when crises appear, alternative measures are already available and don’t need to be acquired, for example if problems occur that threaten the solvency of the company, all proficiency levels of the decision units can be reduced to the minimum operating level. One the one hand, this helps reducing costs very fast, which positively affects the liquidity of the company and on the other hand, it still guarantees an almost smoothly operating schedule.

By taking a look at the employees of a company, it can be shown, that Zero base budgeting has its influence on this part, too. Due to the fact that ZBB is a bottom-up procedure, which means that the whole budgeting process starts at bottom (department manager level) and ends at the top (top management level), all employees are asked to make their contribution to reach the aim of the company, for example during the decision package and ranking process[9]. The result can be a positive effect on motivation, cooperation and empathy with the company, which is embraced by the term “corporate identity”. There are negative consequences as well, which are discussed later. The communication during the ZBB (especially the ranking process) procedure between the different hierarchy levels, enforces a participative leadership in the company, because the top-management on the one hand, and the employees on the other hand, must be willing to identify themselves with the aims of the analysis in detail, in order to guarantee the success of ZBB. The increase in communication and interaction during the Zero base budgeting process among all hierarchy levels, displays weak points in the organization of the whole company and helps to generate ideas for a better organizational structure in the future. The budgets have the function of a skeleton plan, in which self dependent decisions and actions take place. As a secondary effect, which is not to be underrated and evolves during the ranking process, where every manager is able to show his skills, Zero base budgeting provides a tool to appraise the performances of mangers. This gained knowledge is an additional assistance in obtaining qualified manpower. The last advantage of ZBB, which the author wants to mention here, is that it delivers reasons, why certain circumstances and actions are necessary and must be put into practice. Based on the fact, that not all members of a company are always in complete agreement, the top management can use these reasons gained from ZBB in order to accomplish actions towards oppositions.

2.3 Disadvantages of Zero Base Budgeting

Although Zero Base Budgeting has many positives advantages, which are seen above, nevertheless there are negative attributes as well. To mark the start, let’s take a look at the problems, which occur during the implementation of ZBB[10]. Since ZBB “starts from scratch”, it touches existing proportions of power and processes in the company. Resistances against ZBB result from feared loss of power, loss of status and loss of position. Job holders (for example the manager of a cost centre) worry about their scope of decision-making, due to the abolishment of the “status quo”, and tougher working conditions. Given that ZBB implies the justification of all activities, synergetic effects that existed in the company before, might now be overlooked or even wrecked. The short dated cost/benefit analysis can reduce middle- and long dated development perspectives (for example the increase of market share). During the ranking process of the decision packages, there are more influencing factors than just logical arguments, namely money, power, influence and prestige. These influencing factors disturb the decision- and ranking process, by putting individual goals above the goals of the company. The ranking process can evolve frustration of the department managers, whose proposals, concerning decision packages are rejected and whose resources are reduced by reallocation respectively. In consideration of the fact, that every employee has a strong concern in a positive illustration of his own work, there is a chance that important information is restrained on purpose or incompletely passed on. It is clear, that a manager, who is responsible for inefficiency, will do his best to avoid a public confession of guilt. ZBB breaks up crusted structures, which causes riots in the company. To solve the problem, ZBB must be implemented by a strong authority in the company (the top management in most cases), in order to oppose possible resistances and communicated by an expert technician in all divisions (usually done by a “Controller”), who is kept grounded by the authority. It is hard to generate decision packages, which can be completely distinguished from several divisions. For example a low proficiency level of a divisional decision package A, can cause extensive negative consequences for another divisional decision package B[11]. Since ZBB uses the existing structure of the enterprise and the different cost centers, it doesn’t examine processes, that run over multiple cost centers and neglects a possible situation, where higher expenditures in a department can cause above-average savings in more than one department. ZBB doesn’t provide a systematic analysis of the “cost drivers” and their influences, which leads to the fact that by using ZBB, a permanent planning, coordination and control of the overhead costs is not possible[12]. As a result, only short dated reduction of costs is to be noticed. Meyer-Piening (1980, see References) argues in his essay on page 1278, that Zero base budgeting can be used for operational and strategic planning. The author disagrees with Meyer-Piening and follows the opinion of Horvath, that ZBB doesn’t fit into strategic and tactical planning, because the main aims of the company, which are made by the top management, are long dated decisions, that exist over multiple periods and cannot be generated by a budgeting system, which starts from zero every two or three years. Long dated decisions include uncertainty in contrast to short dated operational aims and it is hard to tell if the made predictions really come true. In the product costing, where all costs of the period (direct costs plus overhead costs) are charged among the products the company wants to sell in order to determine the prime costs, it’s not clear how ZBB connects the budgeted overhead costs with the product costing. ZBB is “budgeting at its limit” because it generates decision packages with the lowest proficiency level, which describes a minimum output connected with the minimum costs that is needed to guarantee a smoothly operating process. What happens now, if a defile in an important decision unit (for example: buying department) evolves? The buying department, whatever the reasons might be, is not able to procure the needed raw materials in time, the negative consequences to the production process would be serious. ZBB leads to a puffing of the reporting system, because the budgeted costs and benefits need to be supervised not only during the ZBB analysis, but afterwards as well. Due to the fact, that ZBB is a complex and time consuming procedure (especially the intensive discussions during the ranking process), it’s not recommendable for enterprises, which are in a financial crisis. Last but not least, the implementation and enforcement of ZBB costs money[13].


[1] See Volz, J.: Praktische Probleme des Zero-Base-Budgeting, Zeitschrift für Betriebswirtschaft 1987 p. 875

[2] see Phyrr, P.A.: Zero-base budgeting, Harvard Business Review 1970

[3] see Katugampola, B.: Zero base budgeting, Management Accounting 1977, p.492

[4] see Horvath, P.: Controlling,, Vahlen, Munich

[5] see Marettek, A.: Arbeitsschritte zur Durchführung der Zero-Base-Budgeting-Analyse, Wist 11th volume 1982, Munich, p.261

[6] see Meyer-Piening, A.: Zero-Base Budgeting (ZBB) als Planungs- und Führungsinstrument, paper 27/28, Der Betrieb 1980, p.1281

[7] see Dickertmann, D.: Zero-Base Budgeting und Sunset Legislation, Wist 1992, p.188

[8] see Katugampola, B.: Zero base budgeting, Management Accounting 1977, p.492

[9] see Meyer-Piening, A.: Zero-Base Budgeting (ZBB) als Planungs- und Führungsinstrument, paper 27/28, Der Betrieb 1980, p.1280

[10] Volz, J.: Praktische Probleme des Zero-Base-Budgeting, Zeitschrift für Betriebswirtschaft, 1987, p.870-881

[11] see Marettek, A.: Arbeitsschritte zur Durchführung der Zero-Base-Budgeting-Analyse, Wist 1982, p.262

[12] see Horvath, P.: Controlling,, Vahlen, Munich, p. 279

[13] Volz, J.: Praktische Probleme des Zero-Base-Budgeting, Zeitschrift für Betriebswirtschaft, 1987, p.879

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Zero Base Budgeting Using the Balanced Scorecard
European University Viadrina Frankfurt (Oder)
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Roland Holl (Author)Stefan Böhm (Author), 2005, Zero Base Budgeting Using the Balanced Scorecard, Munich, GRIN Verlag,


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