Zero-based budgeting represents a firm commitment to the company just like any other budget.
Zero-based budgeting is the budgeting method in which the current year budget is prepared without any reference to, or use of, the prior period's budget. This is quite different from a budget that is prepared by looking at the current year's actual or budgeted amounts and simply adjusting them (usually increasing them) for expected changes in the coming year. Though this method is more time consuming and difficult for all of the people involved, there are a number of advantages to the company as a result of using this method. Because the budget is built up from zero, each manager must justify all of the expenses in his or her department. Each component is evaluated from a cost-benefit perspective and priorities are determined. Zero-based budgeting enables the company to identify expenses that are not value adding or that should be reduced due to some development in production methods or something similar.
Activity-based budgeting, not zero-base budgeting, focuses on the budged cost of activities necessary to produce and sell products and services.
This is a description of a static budget, not a zero-base budget. A static budget is a budget that is prepared for only one level of activity within the company. A zero-base budget may be a static budget, but it may also be a flexible budget.
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