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

Orchard Foods replaces its traditional incremental budget with an approach where each manager must justify every activity's cost from zero each year and rank decision packages by benefit. Which budgeting method is this, and what is a key drawback?

This is zero-based budgeting, where every activity is justified from scratch and decision packages are ranked by benefit. A key drawback is that it takes considerable time and effort and can encourage a short-term focus.

  1. AZero-based budgeting; it is time-consuming and may encourage short-term focusCorrect
  2. BActivity-based budgeting; it cannot link costs to activities
  3. CRolling budgeting; it fixes the budget for the full year
  4. DIncremental budgeting; it ignores prior-year figures

Explanation

Justifying all spending from a zero base and ranking decision packages is zero-based budgeting. Its drawbacks include heavy time and administrative effort and possible short-term bias. The other options misdescribe the methods.

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