Priority base budgeting: a practical, zero base approach to manufacturing overheads

The `zero base¿¿ concept originated in the electronics industry, and has been widely applied in the public sector. In times of financial constraint it is an alternative to more arbitrary forms of cost reduction, and is equally helpful for reallocation of resources in an expansionary phase. Traditional methods of cost reduction do not assess alternatives, and can be harmful to the future of the business. The PBB methodology has evolved as a means of re-evaluating and ranking priorities in operational planning, relative to key indicators of output or level of service, so that cost can be equated to benefit. Managers are encouraged to identify the main purposes of their function in presenting their budget proposal. Priorities for resources are ranked by senior management, to arrive at an annual operations plan, against which results can be monitored. The process is participative, and can bring together suppliers and users of services. The process must be adapted to specific needs, and works best in companies with strong leadership. Top management gains a closer understanding of the operating priorities, and there is better communication, and greater commitment of managers to achieve planned objectives of cost and performance.