A. Kaizen is a Japanese term for continuous improvement. When applied to the budgeting process, the philosophy of kaizen leads to expected continuous improvements in the production process. A budget developed on the kaizen philosophy will take into account these expected improvements. B. A flexible budget is a budget with amounts that are adjusted to the actual level of activity that has occurred. With a flexible budget, actual incomes and expenses can be better compared with budgeted incomes and expenses, thus providing the user with variances that are devoid of volume variance issues. However, a flexible budget is not created based on future anticipated improvements.

C. Activity-based budgeting is similar in concept to activity-based costing. Activities that drive the costs are identified, a budgeted level of activity for each of these drivers is determined based on a budgeted level of production, and budgeted amounts are developed based on the budgeted level of activity. This focuses on activities but not necessarily on improvement of performance.

D. Zero-based budgeting is a budgeting method in which the budget is prepared without any reference to, or use of, the current period’s budget and the likely operating results for the current period. In zero based budgeting the manager must start from scratch and justify all incomes and expenses proposed. Future improvements may or may not be included in a zero-based budget but they are not included in it as a matter of course.