What is the Zerobase budgeting ?

Question

Accepted Answer

The correct option is 3: Making a budget every time with a fresh start.

Zero-based budgeting (ZBB) is a budgeting method where all expenses must be justified for each new period, regardless of whether they were approved in the previous budget. It starts from a "zero base," meaning every dollar of expenditure is subject to scrutiny and must be justified as if the activity were being undertaken for the first time. The fundamental idea is to challenge every cost, eliminate wasteful spending, and reallocate resources toward activities that drive organizational value. This systematic review ensures that resources are allocated based on current needs and objectives rather than being based on past budget levels. This makes the budgeting process decision-oriented, requiring managers to build their budget from the ground up by detailing every necessary expense.

The incorrect option is 1: Difference between income and expenditure is zero.
While achieving a zero difference between income and expenditure (a balanced budget) may be a *goal* of any budgeting process, it is not the definition of zero-based budgeting. ZBB refers to the methodology of justifying costs from a zero base, not necessarily the financial outcome of balancing income and outgoings.

The incorrect option is 2: Start the expenditure without any income.
This option suggests spending without having any revenue, which describes financially unsustainable behavior, not a structured budgeting technique. ZBB is a rigorous planning tool used to ensure that resources are spent wisely based on strategic objectives, assuming that income exists or is projected.

The incorrect option is 4: An unrational method of budgeting.
Zero-based budgeting is considered a highly rational and rigorous method of budgeting. While it is time-consuming and labor-intensive, its core purpose is to optimize costs and justify all spending, making it a very logical and strategic financial management tool.