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CA Intermediate · Cost and Management Accounting · Budgets and Budgetary Control

Which statement about zero-based budgeting (ZBB) is correct?

In zero-based budgeting every activity must be justified afresh each period, starting from zero rather than last year's figures. Managers prepare decision packages, which are ranked by their benefit, and resources are allocated according to that ranking.

  1. AEvery activity is justified afresh each period, and activities are ranked through decision packagesCorrect
  2. BBudget is prepared by adjusting the previous year's figures for inflation
  3. CBudget is revised continuously by adding a new month as each month expires
  4. DBudget figures are set only for activity levels expected to be achieved without any ranking

Explanation

ZBB starts from a zero base and requires each activity to be justified, with decision packages ranked by benefit. Adjusting previous figures is incremental budgeting. Adding a new month as one expires describes a rolling (continuous) budget.

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