Question

P 6–2: Investment Banks Rogers Petersen and Cabots are two of the five largest investment banks in the United States. Last year, there was a major scandal at Cabots involving manipulation of some auctions for government bonds. A number of senior partners at Cabots were charged with price fixing in the government bond market. The ensuing investigation led four of the eight managing directors (the highest-ranking officials at Cabots) to resign. A new senior managing director was brought in from outside to run the firm. This individual recruited three outside managing directors to replace the ones who resigned. There was then a thorough housecleaning. In the following six months, 15 additional partners and more than 40 senior managers left Cabots and were replaced, usually with people from outside the firm. Rogers Petersen has had no such scandal, and almost all of its senior executives have been with the firm for all of their careers.

Required: a. Describe zero-based budgeting.

b. Which firm, Rogers Petersen or Cabots, is most likely to be using ZBB? Why?

Answer 1

A. Zero Based Budgeting is a method of budgeting where all spending must be justified for the new period. As the Name says, the budgeting considers from Zero base. All items , spending should be justified individually.

B. Cabots is most likely to be using Zero Based Budgeting Method. Because already a fraud reported and most of the managers are replaced. Accordingly all activities and spending should be justified and should start from a Zero level. There is a total restructuring.

Rogers Petersen has had no scandal and all senior executives are the same and they have already set budgets or a base for all activities and spending.