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CA Intermediate · Financial Management and Strategic Management · Strategy Implementation and Evaluation

Bharat Dairy Ltd. is a strong cash-generating firm that has recently diversified into packaged juices. The CEO asks each unit head to build the case for funds from zero every year, justifying every rupee of expenditure regardless of last year's budget. Which budgeting approach is being applied?

The approach is zero-based budgeting. Under it, every unit must justify all expenditure afresh each year starting from zero, irrespective of previous allocations. Incremental budgeting would instead adjust the prior year's budget, which the CEO has rejected, so it does not fit the described practice.

  1. AIncremental budgeting
  2. BZero-based budgetingCorrect
  3. CRolling budgeting
  4. DPerformance budgeting

Explanation

Zero-based budgeting requires every activity to be justified afresh each period, starting from a zero base. Incremental budgeting would add or subtract a percentage from last year's figures, which is the opposite of what the CEO demands. Rolling budgeting continually adds a new period and performance budgeting links spending to outputs.

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