A company is preparing its annual budget and decides that no department will automatically receive last year’s allocation. Instead, every activity must be analysed and justified afresh based on its necessity and expected benefits before funds are approved. Which budgeting approach is the company following?

Solution

Zero-based budgeting is a method of budgeting where all expenses must be justified for each new period. Every function and expense is reviewed, and budgets are approved based on need and cost-benefit analysis, rather than a past budget. It requires every line item of the budget to be justified from scratch (i.e. zero base).   Note: ·        Flexible budgeting - Adjusts with activity level only ·        Incremental budgeting - Based on previous year + small changes ·        Fixed budgeting - Prepared for one level of activity ·        Performance budgeting - Links budget with output/performance, not zero base