What is the Difference Between Zero Based Budgeting and Performance Budgeting?

The main differences between zero-based budgeting and performance budgeting are their focus, usage, and the way they are applied. Here is a comparison of the two budgeting methods:

Zero-Based Budgeting:

• Focus: Efficiency, cost reduction, and resource allocation based on actual numbers, not past budgets.
• Usage: Primarily used by corporates.
• Method: Starts from scratch, analyzing each granular need of the company, instead of incremental budgeting.
• Advantages: Efficiency, accuracy, cost reduction, coordination, and communication within departments, and reduction in redundant activities.
• Disadvantages: Time-consuming and may favor areas that achieve direct revenues or production.

Performance Budgeting:

• Focus: Effective resource allocation and taking into account the inputs and output per unit.
• Usage: Primarily used by governments and public sector organizations.
• Method: Budgeted expenditures are based on a standard cost of inputs multiplied by the number of units of an activity or level of service to be provided.
• Advantages: Provides a basis for comparing results and evaluating performance to take corrective actions for the future.
• Disadvantages: May not evaluate the appropriateness of program activities and is more useful for routine activities.

In summary, zero-based budgeting is more focused on cost reduction and efficiency, while performance budgeting is centered on effective resource allocation and evaluating performance. Zero-based budgeting is more popular among corporates, whereas performance budgeting is primarily used by governments and public sector organizations.

Comparative Table: Zero Based Budgeting vs Performance Budgeting

Here is a table comparing zero-based budgeting and performance budgeting:

In summary, zero-based budgeting starts from scratch and justifies each expense, focusing on cost reduction and better efficiency. Performance budgeting, on the other hand, is focused on effective resource allocation and is primarily used by governments and public sector organizations. It bases expenditures on a standard cost of inputs multiplied by the number of units of output.