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Question

Refer to the following information to answer the next 4 questions (Q 23 to Q 26) A budget is a financial blueprint that plays a fundamental role in the strategic management of finances for individuals, businesses, and governments. It serves as a comprehensive plan, projecting anticipated income and allocating funds to various expenses over a specific period, typically a fiscal year. The primary objectives of a budget are multi-faceted. It serves as a planning tool, enabling the establishment of financial goals and the systematic allocation of resources to meet these objectives. Moreover, budgets provide a framework for financial control by allowing individuals and organizations to compare actual financial performance against the budgeted figures, facilitating adjustments and corrective measures as needed. Beyond control and planning, budgets foster financial accountability and transparency. They create a structured approach to financial decision-making, aligning expenditures with priorities and strategic objectives. A well-constructed budget encourages financial discipline by setting clear expectations and promoting responsible resource management. It also serves as a communication tool, ensuring that stakeholders within an organization are on the same page regarding financial expectations and constraints. Furthermore, budgets contribute to emergency preparedness by allocating funds for unforeseen circumstances, thereby enhancing financial resilience. They facilitate goal alignment, directing financial resources toward achieving specific targets, whether it be saving for a major purchase, reducing debt, or investing in growth opportunities. In addition, budgets support effective debt management by incorporating debt repayment into the financial plan. They also play a crucial role in performance evaluation, allowing for regular assessments of financial results and the adjustment of strategies and goals accordingly.

Which among the following is a type of budgeting technique where the previous year’s figures are not used as a base for preparing next year’s budgets.

A Zero Based Budgeting Correct Answer Incorrect Answer
B Performance Budgeting Correct Answer Incorrect Answer
C Activity Based Budgeting Correct Answer Incorrect Answer
D Incremental Budgeting Correct Answer Incorrect Answer
E None among the above Correct Answer Incorrect Answer

Solution

In Zero Based Budgeting, the previous year’s figures are not used as a base for preparing next year’s budgets. Budget figures are developed with zero as the base, which means that the budget will be prepared as if it is being prepared for a new company for the first time.  It involves a planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base). It is in contrast to Incremental Budgeting, where the next year’s budget is prepared keeping the previous year’s budget as the base.

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