Zero Based Budgeting Flashcards, test questions and answers

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What is Zero Based Budgeting?

Zero Based Budgeting (ZBB) is a budgeting process in which all expenses must be justified for each new period. It involves making decisions on investments and spending based on current needs rather than past practices or previous levels of expenditure. This type of budgeting allows companies to prioritize their expenses, identify wasteful spending, and make informed decisions about where to allocate resources.The goal of ZBB is to ensure that all costs are justified and necessary for the organization’s success. To do this, the organization must analyze each expense individually and ask whether it is necessary or an unnecessary cost. After performing an analysis, if a cost is deemed unnecessary then it should be eliminated or minimized as much as possible. By doing this, organizations can more effectively allocate resources towards their most important initiatives and goals. One of the advantages of ZBB is that it allows organizations to better manage their money by identifying wasteful spending and making informed decisions about where to invest resources instead. This helps them save money in the long run as well as use funds more efficiently and effectively. Additionally, ZBB encourages employees to think critically about why certain expenses are made, which can lead to improved decision-making overall within the organization. However, there are some drawbacks associated with ZBB that organizations should consider before implementing it in their operations. First off, this approach requires extra effort from managers due to the need for detailed analysis of each expense item every year or period. Additionally, since budgets must be reset at regular intervals this may cause confusion among departments who have become accustomed to having certain amounts allocated each year without needing justification every time a new budget is established. Finally, since Zero Based Budgeting requires short-term thinking when making financial decisions there may be times when important long-term investments are overlooked or discounted due to lack of immediate return on investment (ROI).