Question

What budgeting approach requires justification for the inclusion of every activity each year? Briefly describe this method and how it can be effective.

Answer 1

Zero-base budgeting

A zero-base budget requires managers to justify all of their budgeted expenditures, rather than the more common approach of only requiring justification for incremental changes to the budget or the actual results from the preceding year. Thus, a manager is theoretically assumed to have an expenditure base line of zero (hence the name of the budgeting method).

In reality, a manager is assumed to have a minimum amount of funding for basic departmental operations, above which additional funding must be justified. The intent of the process is to continually refocus funding on key business objectives, and terminate or scale back any activities no longer related to those objectives.

The basic process flow under zero-base budgeting is:

1.       Identify business objectives

2.       Create and evaluate alternative methods for accomplishing each objective

3.       Evaluate alternative funding levels, depending on planned performance levels

4.       Set priorities