Question

NN ltd manufactures and markets a range of electronic office equipment.The company currently has a turnover of $40m per annum. The company has a functional structure and currently operates an incremental budgeting system. The company has a budget committee that is comprised entirely of members of the senior management team. No other personnel are involved in the budget setting process.

Each member of the senor management team has enjoyed an annual bonus of 10% and 20% of their annual salary for each of the past 5 years.The annual bonuses are calculated by comparing the actual costs attributed to a particular function with budgeted costs for that function during the 12 month period ended 31 dec in each year.

A new finance director, who previously held a senior management position in a ‘not for profit’ health organization, has recently been appointed. Whilst employed by the health service organization, the new finance director had been the manager responsible for the implementation of a zero based budgeting system which proved highly successful.

Explain how the implementation of a ZBB system in NN Ltd may differ from the implementation of such a system in a not for profit health organization?

Identify and discuss the behavioural problems that management of NN ltd might encounter in implementing a system of zero based budgeting recommending how best to address such problems in order that they they are overcome?