Zero Based Budget

Posted in Finance, Accounting and Economics Terms, Total Reads: 1939
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Definition: Zero Based Budget

A Zero Based Budget is a budget where all the expenses have to be justified i.e a budget is prepared as if it were being done for the first time for every new period.


In a traditional budgeting process there is only a incremental change made on the budget of the previous period – however in zero based budget, a fresh budget is made from scratch for every period. The traditional method of budgeting assumes the expenses incurred in the previous period as given, whereas this method examines each item in great detail.


This helps reducing costs by preventing direct incremental increase in previous period budget. However, there is more effort involved and more time consuming than traditional budgeting techniques. It also helps avoid any wasteful expenditure and only incur those which will result in substantial benefit.


All government agencies adopted Zero based budgeting in the USA under Jimmy Carter to ensure better utilization of public funds.

 

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