Zero Based Budgeting is formally defined as “operating planning and budgeting process which requires each manager to justify his or her entire budget request in detail and shifts the burden of proof to each manager to justify why he or she should spend any money.  This procedure requires that all activities and operations be identified in decision packages which will be evaluated and ranked in order of importance by systematic analysis.”  This definition needs some explanation.  

 ·       A manager may be in charge of more than one function.  A secretary in the Govt. could be in charge of two or more diversified departments, similarly one executive could be in charge of more than one function say purchasing and Legal in an industrial organization.  The budget is prepared for each identifiable function, which are called Decision Units.

·       A manager, in order to justify why he should need any money has to identify the activities or programs and justify each of those, which are called “Decision Packages”.

·       These activities / programs will be evaluated and ranked on the basis of the benefits to be realized and costs incurred.  The measure should then be the Benefit Cost Ratio. 

·       The choice of the Decision package will be limited to the funds available and the one offering maximum benefits.