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A Zero Based Budget requires department and divisional managers to justify all of their budgeted expenditures and possible returns out of it, rather than the conventional approach of analyzing the variances from the budget Vs the actual results. A Finance Professional is assuming the base line of zero in expenditure and it is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history
Zero budgeting is a management accounting tool that helps keep costs down. It involves starting from scratch for each new period and each cost to be fully justified ie it should be based on actuals. It would also involve showing revenues generated for the company out of each cost.
Zero based as the name signifies is not linked to the historic spend or existing cost mass. Instead it demands the justification of estimated cost as if it has occurred for the very first time. Each cost driver must be individually evaluated and each assumption is challenged to arrive at the exact budget requirement, providing avenues to enhance cost efficiency.
Zero-based budgeting is a method of budgeting in which all expenses must be justified for each new period. A zero-based budgeting start from a “zero base” and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.
