Zero-based budgeting is an approach to budgeting in which budgeting process is done as if the company starts its operations on the year of budgeting.
It requires activities to be evaluated each time a budget is produced. Each functional budget is prepared on the basis that each cost element is justified as though the activities were occurring for the first time. No item of expenditure is included in the budget without full prior evaluation and justification.
- It eliminates unnecessary expenditure being retained in budgets,
- It focuses attention on achieving value for money,
- If properly implemented, it should lead to the more efficient allocation of resources,
- It leads to greater understanding by the management of the working of the organization,
- It allows the question to be asked by managers before committing funds and not afterward as in traditional budgeting