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. Although this approach would be appropriate when the next year's volume is expected to far exceed this year’s sales volume, it is still a static budget. And a static budget does not make allowance for changes in volume that may take place. Therefore, this would not be the best choice in this situation.
A flexible budget would be the most appropriate budget, as it would allow management to measure operating success at any activity level experienced. A flexible budget can be adjusted upward for increased traffic and, if necessary, adjusted back down when the construction is completed, providing management with accurate budget variance information under a variety of circumstances.
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 is a good basis for developing a budget, but since it depends upon a budgeted level of activity, the budget developed will be a static budget that will not make allowance for changes in volume that may take place. Therefore, this would not be the best choice in this situation.
A rolling budget is a continual budget that adds one month as another month is completed. This type of budget is a static budget, and a static budget does not make allowance for changes in volume that may take place. Therefore, this would not be the best choice in this situation.
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