In zero-based budgeting, budget analysts make the decision without copying from the information of past years.
They prepare the budget from a “zero-base”. All revenue and expenses from activities are evaluated for every new period. The budget analysts will prepare the “decision package” including different policy alternatives resource allocations and performance measurements. The higher-level managers will then rank those projects. The lowest-ranking projects will not get funded (p.99). This format ensures accuracy and efficiency since the department should reexamine the budget in each period instead of just making some arbitrary changes to the previous year’s budget.
It will better help them in cost reduction and funding. However, using ZBB is complicated and time-consuming because it requires large amount of analysis. The manager cannot review thousands of decision packages. In addition, some programs using ZBB is difficult to control its appropriations such as “veterans’ benefits, social security, interest payments on the national debt, retirement payments to federal workers, and food stamps” (p.100). Furthermore, ZBB cannot judge priorities between different programs. In contrast, target-based budgeting is a format that higher-level managers set the priorities and limits to the bottom officials.
Compared with ZBB, departments use TBB have less time-consuming analysis and more autonomy by deciding priorities and projects if these are within the target allocations which is set by the central government. The City of Charlotte, North Carolina uses a balanced scorecard and TBB approach. The budgeting office use the similar analysis of ZBB such as “cost accounting, productivity studies, performance measurement, strategic planning, and MBO” (p.101). They also use a balanced scorecard for top managers to track the performance and execution of staffs and results.
The disadvantage of TBB is “TBB permits non- rational reallocation decisions (randomly establish amounts of money) and political tradeoff decisions among departments” (p.101).