XY, a not-for-profit charity organization which is funded by public donations, is concerned that it is not making the best use of its available funds. It has carried out a review of its budgeting system and is considering replacing the current system with a zero-based budgeting system.
Select ALL the potential advantages AND disadvantages for the charity of a zero-based budgeting system.
- It avoids the complacency inherent in the traditional incremental approach where it is assumed that future activities will be very similar to current ones.
- It discourages a questioning approach by focusing attention not only on the cost of the activity but on the benefits it provides. The charity managers will not articulate the benefits encouraging them to think clearly about the activities.
- Preparation of the decision packages will normally require the environment of many employees. This environment may produce useful ideas and promote job satisfaction.
- The creation of decision packages and their subsequent ranking by top management is very time consuming and costly. The charity will need to assess whether the benefits of the system outweigh the costs involved.
- In an organization like a charity, the decision packages are not very disparate and difficult t compare.
- In applying traditional budgeting, ‘activities’ may result in functional departments rather than cross functional activities and thus distract attention from the real cost-reduction issues.