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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Brightwell Hospital's budget for its maintenance department has been cut by the board. The department head argues that the budget should be justified by reference to the services needed and their costs, with each service package ranked against alternatives, starting from a zero base. Which is the most significant practical limitation of adopting this approach across the whole hospital?

The main limitation of zero-based budgeting is the heavy time and effort needed to justify and rank every activity, and the difficulty of ranking essential, non-discretionary services. It can also encourage a short-term focus. It does not rely on prior-year figures and demands more manager input.

  1. AIt requires substantial management time and may encourage short-term focus, with some essential, non-discretionary activities difficult to rankCorrect
  2. BIt cannot identify inefficient activities because it relies on prior-year spending
  3. CIt makes budgets unresponsive to changes in activity levels
  4. DIt removes the need for managers to participate in budget setting

Explanation

Zero-based budgeting requires every activity to be justified and ranked in decision packages, which is time-consuming and can be hard to apply to essential, non-discretionary services. It does not rely on prior-year spending, and it demands greater, not less, manager involvement.

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