Cost and Management Accounting · Budgets and Budgetary Control

Zero Based, Performance and Other Budgeting Techniques

Updated 4 October 2026 · Fact-checked

Zero-based budgeting (ZBB) builds each budget from zero, so every activity must be justified afresh. You list activities as decision packages, rank them by benefit against cost, and fund them in rank order until the budget limit. Performance and programme budgets link spending to outputs and objectives.

Understand Zero Based, Performance and Other Budgeting Techniques

A traditional budget starts from last year's figures and adds a percentage for inflation or growth. The weakness is that old, useless spending carries on year after year. Nobody asks whether the activity is still needed.

Zero-based budgeting (ZBB) removes this habit. Every manager starts from a zero base and must justify every activity and its cost as if it were new. Nothing is accepted just because it was spent last year. The question changes from "how much more do I need?" to "why do we do this at all, and what does it give us?"

ZBB works through decision packages. A decision package describes one activity or group of activities: its purpose, cost, benefits, the consequence of not doing it, and alternatives. For each activity, the manager may prepare packages at different levels, such as a minimum level (essential) and higher levels (incremental). Management then ranks all packages in order of priority, using cost-benefit judgement. Funds are allocated from the top of the ranking down until the available resources run out. Packages below the cut-off are not funded.

Performance budgeting focuses on what is achieved, not just what is spent. Each function or department has its inputs (cost) linked to outputs (results) and measured against performance targets, such as cost per unit of work done. Programme budgeting is similar but organised around programmes or objectives, which may cut across departments. It links long-term goals to the money needed to reach them and is common in government and public bodies. Performance budgeting is usually seen as a form of programme budgeting with a stronger focus on measuring output and responsibility.

In the exam, expect theory questions: steps of ZBB, its benefits and limitations, differences from traditional budgeting, and short notes on performance or programme budgeting. Sometimes you get a small ranking problem.

Key rules to remember

ZBB funding rule: Fund packages in rank order until cumulative cost reaches the budget limit; Rank by benefit relative to cost. Essential (minimum) packages come before incremental ones for the same activity.
Benefit-cost ratio (ranking aid): Benefit-cost ratio = Estimated benefit ÷ Cost of package; Use only when benefits are given in money. A higher ratio means a higher rank. Check that an incremental package is not ranked above its own base package.
Cost per unit of output (performance budgeting): Cost per unit of output = Budgeted cost of activity ÷ Units of output; Compare actual with budgeted figures to judge performance.

How to solve Zero Based, Performance and Other Budgeting Techniques questions

Use this method for both theory and numerical questions on ZBB and related budgeting techniques.

1Read the question and identify the technique asked: ZBB, performance budgeting, programme budgeting or a comparison.
2For a theory question on ZBB, write the steps in order: define objectives, identify activities, prepare decision packages, rank them, allocate resources, then monitor.
3For a numerical ranking question, list each package with its cost and benefit. Mark which are base (minimum) packages and which are incremental.
4Calculate the benefit-cost ratio if benefits are in money. Otherwise rank by the priority or score given.
5Rank the packages. Make sure a base package of an activity is ranked above its incremental packages, even if the ratio suggests otherwise.
6Add the costs cumulatively in rank order and stop where the budget limit is reached. State which packages are funded and which are not.
7For comparison questions, use a two-column layout of points: base of budget, justification, focus, and so on.
8Close with a short conclusion on benefits or limitations if the question asks for evaluation.

Quickest way: Rank, add up, cut off

When to use it: Use this for ZBB numerical questions and for short-note answers when time is short.

For MCQs, remember the key words: ZBB equals start from zero, decision package, ranking; performance budget equals output and cost per unit; programme budget equals objectives and programmes.
If an MCQ asks which is not a feature of ZBB, eliminate options mentioning last year's figures as the base.
For numericals, write one small table: package, cost, benefit, ratio, rank, cumulative cost.
Draw the cut-off line where the cumulative cost passes the budget limit.
For written answers, use numbered points with a bold heading each. One line of explanation per point earns the step marks.
For a comparison, give at least five paired points. Keep each point to one line.

Common mistakes in Zero Based, Performance and Other Budgeting Techniques

Saying ZBB means the budget is zero.
The name sounds like the final amount is nil.
Fix: Write that only the starting base is zero. Every activity must be justified afresh and funded only if it ranks high enough.
Ranking an incremental package above its own base package.
Students rank only by benefit-cost ratio and forget that the higher level depends on the minimum level.
Fix: Always fund the minimum level of an activity first. Then consider the incremental levels in the overall ranking.
Mixing up performance budgeting and programme budgeting.
Both link money to results, so the definitions look alike.
Fix: Remember: performance budgeting measures output against cost for each function. Programme budgeting is built around programmes or objectives that may span departments.
Listing only benefits of ZBB and ignoring limitations.
Students learn the positive side better.
Fix: Always give both sides: time-consuming, needs training, paperwork, hard to quantify benefits of support functions, managers may inflate packages, and short-term focus.
Writing the steps of ZBB in the wrong order.
Ranking and allocation get swapped.
Fix: Learn the order: objectives, activities, decision packages, ranking, allocation, monitoring. Ranking always comes before allocation.

Worked examples

Example 1

A division has a budget limit of ₹10,00,000. Its manager submits these decision packages: A (base, Sales support) cost ₹4,00,000; B (incremental, Sales support) cost ₹2,00,000; C (base, Training) cost ₹3,00,000; D (Maintenance) cost ₹3,00,000; E (Research) cost ₹2,00,000. Management ranks them in this order: A, C, D, B, E. Which packages are funded?

Show the solution

List packages in ranked order with costs: A ₹4,00,000; C ₹3,00,000; D ₹3,00,000; B ₹2,00,000; E ₹2,00,000.
Cumulative cost after A = ₹4,00,000.
After C = ₹4,00,000 + ₹3,00,000 = ₹7,00,000.
After D = ₹7,00,000 + ₹3,00,000 = ₹10,00,000. This equals the budget limit.
Adding B would make ₹12,00,000, which exceeds ₹10,00,000. So B and E are not funded.
Check that base package A is funded before its incremental package B. Yes, A is funded.

Answer: Funded: A, C and D, total ₹10,00,000. Not funded: B and E.

Example 2

Distinguish between traditional budgeting and zero-based budgeting in five points.

Show the solution

Base: Traditional budgeting starts from the previous year's figures. ZBB starts from zero.
Justification: In traditional budgeting only the increase over last year is justified. In ZBB every activity and its full cost is justified.
Focus: Traditional budgeting focuses on cost and departments. ZBB focuses on activities and their benefits.
Resource allocation: Traditional budgeting allocates by historical pattern. ZBB allocates by ranking of decision packages.
Inefficiency: Traditional budgeting may carry forward old wasteful spending. ZBB tends to find and remove it.
Effort: Traditional budgeting is simpler and quicker. ZBB needs more time, paperwork and training.

Answer: The five points are base of budget, justification, focus, allocation of resources and effort/inefficiency, as set out above. ZBB is more rigorous but also more time-consuming than traditional budgeting.

Exam tips

Learn the ZBB steps as a fixed list. Examiners often ask for the process in 4 to 6 points.
In comparison questions, write clear paired points. Do not write two separate paragraphs.
For ranking problems, check the base-before-incremental rule before you add up the costs.
Give both benefits and limitations of ZBB when the question says 'discuss' or 'evaluate'.
Attempt every MCQ. There is no negative marking, and key-word elimination often gets you the answer.

Practice questions from Budgets and Budgetary Control

Zero Based, Performance and Other Budgeting Techniques in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Zero Based, Performance and Other Budgeting Techniques: frequently asked questions

What are the steps in zero-based budgeting?

First set objectives and identify activities. Then prepare decision packages for each activity, rank them in order of priority, and allocate resources from the top rank down. Finally, monitor performance against the budget.

What is a decision package in ZBB?

It is a document describing one activity or level of activity. It states the purpose, cost, benefits, consequences of not doing it and alternatives. Managers rank these packages to decide what to fund.

What is the difference between performance budget and programme budget?

A performance budget links the cost of each function to its output and measures results, such as cost per unit of work. A programme budget is organised around programmes or objectives, often across departments. Both connect spending to results.

What are the main limitations of ZBB?

It takes a lot of time, effort and paperwork, and managers need training. Benefits of support activities are hard to measure. Managers may also inflate the importance of their packages, and the focus can shift to short-term results.