ACCA Performance Management (F5) Certification Practice Exam

What does a zero-based budget aim to eliminate?

1. All forms of budgeting

2. Previous budgeting habits and assumptions

3. Inflation adjustments

4. All activities not producing returns

The correct answer is: Previous budgeting habits and assumptions

A zero-based budget is a budgeting approach that requires each new budget period to start from a "zero base," meaning that all expenses must be justified for each new period, rather than being based on previous budgets. This method effectively challenges existing financial practices by ensuring that each item of expenditure is thoroughly analyzed and justified, leading to the elimination of outdated practices and assumptions that may no longer be relevant. By focusing on the necessity of each expense, zero-based budgeting encourages managers to reassess and rethink previous budgeting habits, fostering a culture of justifying all costs rather than simply rolling over existing budgets with slight adjustments. This can lead to more efficient allocation of resources, prioritization of key activities, and the identification of areas where spending can be reduced or eliminated entirely. Contrastingly, inflation adjustments and the elimination of all activities not producing returns are not the central tenets of zero-based budgeting. While a zero-based budget may indirectly lead to the reassessment of inefficient activities, its primary goal is not solely to remove non-performing activities but to review all budgeting decisions and habits from scratch, ensuring each cost is necessary and justified.