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ACCA Strategic Professional · Advanced Performance Management · Budgetary planning and control

Harlow Components uses incremental budgeting. Its support function spent $800,000 last year. Management expects 5% general inflation, and it has decided to adopt zero-based budgeting (ZBB) for the coming year. Which statement about the likely effect of ZBB on the support function is correct?

Under ZBB each activity is justified from zero and ranked as decision packages, so the budget could end up above or below the incremental figure of $840,000. Funding follows the value of activities, not last year's spend plus inflation.

  1. AThe budget will automatically be $840,000, since ZBB starts from last year's spend plus inflation
  2. BEach activity must be justified from a zero base and ranked in decision packages, so the budget may be lower or higher than $840,000 depending on the value of activitiesCorrect
  3. CThe budget will necessarily be lower, because ZBB is designed only to cut costs
  4. DZBB removes the need for managers to participate, because the finance team builds the budget from historic data

Explanation

ZBB requires every activity to be justified afresh, with decision packages ranked by cost and benefit. Funding then follows priorities, so the outcome can be above or below the incremental figure of $800,000 x 1.05 = $840,000. The first option describes incremental budgeting, and ZBB requires heavy manager involvement.

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