Do you have an example of zero based budgeting?

image_2.pngSure, suppose a company making construction equipment implements a zero-based budgeting process calling for closer scrutiny of the expenses in its manufacturing department. The company notices that the cost of certain parts used in its final products and outsourced to another manufacturer is increasing 5% every year. The company has the capability to make those parts in-house and with its own workers. After weighing the positives and negatives of making the parts in-house, the company finds that it can make the parts cheaper than the outside supplier.

Instead of blindly increasing the budget by a certain percentage and masking the cost increase, the company has identified a situation in which it can either make the part or buy the part for its end products. With traditional budgeting, cost drivers within departments may not be identified, while zero-based budgeting is a more granular process that aims to identify and justify expenditures. (Note) Since zero-based budgeting is more involved, however, the costs of the process itself must be weighed against the savings it may identify. 


Was this article helpful?
0 out of 0 found this helpful
Have more questions? Submit a request



Please sign in to leave a comment.