Week 6 Problems .docx

Week 6 Problems .docx - P 6-2 Investment Banks a Describe...

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P 6-2: Investment Banks a. Describe zero-based budgeting. Ans: Zero based budgeting (ZBB) is a form of budgeting in which each and every line item request in every budget must be justified by demonstrating that the benefits from requesting this amount of money exceed the amount requested. ZBB differs from the more typical case of incremental budgeting, in which only the increment over last year’s budget on each line item is justified. Presumably, ZBB better roots out inefficiencies in the firm by forcing each manager to demonstrate that each and every expenditure is in the best interest of the firm. However, ZBB is more time consuming and thus more costly to operate than incremental budgeting. Moreover, ZBB tends to deteriorate into an incremental-type budgeting system whereby each year manager pull out last year’s justifications and make incremental changes to last year’s plan. b. Which firm, Rogers Petersen or Cabots, is most likely to be using ZBB? Why? Ans: All budgeting systems separate decision management from decision control. Managers who propose next year’s budgets do not have the decision control rights to approve such requests. Those with the decision monitoring rights must have the specific knowledge to exercise the ratification rights. While ZBB is more costly to operate than incremental budgeting, it is more useful in the sense that it transfers more specific knowledge about each line item comprising the budget. In organization that experience high turnover among the people with decision monitoring right, the benefits of ZBB are higher than in firms with more stable management.
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