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ACCA Strategic Professional · Advanced Performance Management · Performance optimisation in specific contexts

Dunmore Council allocates its annual budget to departments by adding 3% to each prior-year budget. Department heads routinely spend any surplus in the final quarter. Which budgeting approach would most directly address this behaviour by requiring each activity to be justified afresh?

Zero-based budgeting is the answer because every activity must be justified from scratch each period, removing automatic uplifts and the incentive to spend surplus funds just to secure next year's allocation. Incremental budgeting, as currently used, perpetuates inefficiency and year-end spending.

  1. AIncremental budgeting
  2. BZero-based budgetingCorrect
  3. CRolling budgeting with 3% uplift
  4. DFixed budgeting based on last year's actuals

Explanation

Zero-based budgeting starts from zero and requires each activity's costs and benefits to be justified, removing the incentive to spend to protect next year's allocation. Incremental budgeting is the current approach that causes the problem.

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