zero-based budgeting


Zero Based Budgeting

A system of budgeting where each department or division of a company must justify all expenditures and allocations rather than simply increases over the previous fiscal year. That is, the budget is made with every department starting at zero dollars to spend, and each department must demonstrate need for what it wants to receive. Zero-based budgeting is advantageous because it is more detail-oriented than other forms of budgeting; among other things, it makes it easier to detect and eliminate over-inflated budgets. On the other hand, zero-based budgeting is more difficult and time consuming to put together and often has a bias toward departments that directly produce revenue instead of departments like R&D.

zero-based budgeting

a management accounting technique that seeks to re-examine and challenge the assumptions underlying a firm's costs. Zero-based BUDGETING involves preparing from scratch a budget for each company department, starting from the basic premise that each department's budget is zero, then justifying every activity and its associated expenditure before including it in the budget. This contrasts with conventional budgeting, where departmental budgets are often based on last year's budget suitably updated. The purpose of this process is to identify and remove inefficient or obsolete activities within the firm.