Zero-based budgeting (ZBB) builds each budget from zero: every cost must be justified, rather than adjusting last year's figures. Managers describe activities as decision packages, rank them, and fund them in order until the money runs out. Peter Pyhrr developed it at Texas Instruments around 1970. It cuts waste but takes much more time than incremental budgeting.
ZBB vs incremental budgeting
| Zero-based | Incremental | |
|---|---|---|
| Starting point | Zero | Last year's budget |
| Question asked | Should we spend this at all, and how much? | How much more or less than last year? |
| Effort | High | Low |
| Waste removed | Yes, past spending is challenged | No, past waste carries forward |
| Best for | Discretionary costs (marketing, admin, support functions), or a turnaround | Stable organisations with predictable costs |
Worked example
A marketing manager for a heritage charity like Historic Places (March 2025 pre-seen) prepares decision packages for next year:
| Package | Cost (£000) | Benefit | Rank |
|---|---|---|---|
| Core website and booking | 120 | Essential for ticket sales | 1 |
| Membership email programme | 40 | Renewals and upgrades | 2 |
| Paid social campaign | 80 | New younger visitors | 3 |
| Printed brochure | 60 | Mainly older members; can move online | 4 |
With £220,000 available, the first three are funded and the brochure is cut. Under incremental budgeting, the brochure would probably have rolled over.
Good budgeting practice
Whatever method is used, Chapter 18 of the book stresses: a serious attitude to sticking to budgets, manager buy-in to the targets, reliable data and reporting, and variance analysis to explain and act on differences between budget and actual.
Zero-based budgeting in ACCA SBL
Budgeting sits in finance (syllabus area G) and performance management. A typical case has costs growing each year without clear benefit. Recommend ZBB for discretionary costs, explain the effort and behavioural risks (managers gaming rankings, cuts to long-term investment), and suggest a phased approach, perhaps one department a year.
Advantages
- Removes waste and outdated spending
- Links spending to objectives
- Makes managers understand their costs
- Useful in turnarounds
Limitations
- Very time-consuming
- Needs skilled managers
- Can encourage short-term cuts
- Hard to apply to fixed or essential costs
FAQs
What is zero-based budgeting?
A budgeting method where every cost must be justified from zero each period, rather than starting from last year's budget and adjusting it.
Who invented zero-based budgeting?
Peter Pyhrr, at Texas Instruments around 1969 to 1970. He described it in a 1970 Harvard Business Review article. Jimmy Carter used it as Governor of Georgia and later in the US federal government.
What is a decision package?
In ZBB, a description of an activity, its cost and benefits, and what would happen at different spending levels. Managers rank the packages and fund them in order until the budget runs out.
What are the advantages and disadvantages of ZBB?
It removes waste and challenges old spending, but it takes much more time and effort than incremental budgeting and can lead to short-term cuts in areas such as training and research.
What is the difference between zero-based and incremental budgeting?
Incremental budgeting takes last year's figures and adds or subtracts a percentage. ZBB starts from nothing and requires every cost to be justified.