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CA Intermediate · Cost and Management Accounting · Budgets and Budgetary Control

A company prepares its budget by starting afresh each period, justifying every item of expenditure from zero base without reference to the previous period's spending. This approach is best described as:

The approach is zero base budgeting, because each activity and expense is justified from scratch for the new period without relying on past spending. Incremental budgeting instead adjusts last period's figures, and rolling budgets are continuously extended by adding a new period.

  1. AZero base budgetingCorrect
  2. BIncremental budgeting
  3. CRolling budgeting
  4. DPerformance budgeting

Explanation

In zero base budgeting every activity and its cost must be justified afresh, irrespective of past levels. Incremental budgeting adds or subtracts a percentage to prior-year figures, so it is the opposite approach. Rolling budgets are updated continuously by adding a new period as one expires.

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