Zero-based budgeting

Definition

Zero-based budgeting is a method where each new budget period starts from a 'zero base,' and every expense must be justified. Unlike traditional budgeting, past budgets are not considered, making this approach more flexible and accurate in allocation.

5 Must Know Facts For Your Next Test

1. Zero-based budgeting requires justifying all expenses, not just increases or changes.
2. It promotes efficient resource allocation by evaluating each department’s needs from scratch.
3. This method can identify redundant or unnecessary expenditures, leading to cost savings.
4. Zero-based budgeting can be time-consuming and resource-intensive due to its detailed nature.
5. It encourages a culture of accountability and transparency within the organization.

Review Questions

• How does zero-based budgeting differ from traditional budgeting?
• What are the main advantages of using zero-based budgeting?
• Why might an organization find zero-based budgeting time-consuming?

Related terms

Incremental Budgeting: A method where the new budget is based on the previous period's budget with incremental adjustments.

Activity-Based Budgeting:

A budgeting method that assigns costs based on activities that drive costs rather than historical data.

Flexible Budgeting:

A dynamic approach that adjusts budgeted amounts for actual levels of activity.