What is zero-based budgeting?

Zero-based budgeting is a budgeting approach that begins from a zero base, meaning that every expense must be justified for each new period, regardless of past budgets or expenditures. This approach requires managers to evaluate the needs of their departments and allocate resources based on the current operational requirements, rather than simply increasing budgeted amounts based on previous years’ budgets.

This method encourages a thorough review of all expenditures and prioritizes funding for projects or departments that contribute visibly to the organization's goals, thus fostering efficient allocation of resources and potentially uncovering areas where cost savings can be realized. The objective is to avoid unnecessary spending and improve overall budget efficiency by ensuring that all expenditures add value to the organization.

In contrast, the other options describe aspects of budgeting that do not align with the principles of zero-based budgeting. For instance, a strategy that only increases past expenditures, limits to fixed costs, or relies heavily on previous budgets would not necessitate the same level of scrutiny and justification required by a zero-based budgeting approach.