## **Learning Outcomes**

After reading this article, you will be able to explain the principles and steps of zero-based budgeting (ZBB) and its role in prioritisation for budget frameworks in the ACCA Performance Management (PM) exam. You will understand the creation and ranking of decision packages, how ZBB enables resource prioritisation, and the practical advantages and drawbacks of this approach.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you are required to understand advanced budgetary systems and how they fit within the planning and control cycle. This article specifically focuses on:

- The concept and purpose of zero-based budgeting (ZBB)
- How to construct and prioritise decision packages in budgeting
- The process of resource allocation under ZBB
- Comparative strengths and weaknesses of ZBB versus other frameworks
- Application of ZBB and prioritisation in a public sector or discretionary expenditure context

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is the core first step in zero-based budgeting?
   a) List last period’s expenditure
   b) Justify each activity from scratch
   c) Fix targets based on previous budgets
   d) Apply an inflation adjustment

2. What is a "decision package" in zero-based budgeting?
   a) A list of all costs from last year
   b) A justification and costing of an activity or project
   c) A summary of incremental changes to a function
   d) A document for tracking variances

3. True or false? In ZBB, all activities are automatically assumed to be essential and funded in the new budget period.

4. State one key advantage and one main disadvantage of zero-based budgeting compared to incremental budgeting.

## **Introduction**

Traditional budgeting approaches, such as incremental budgeting, typically start from last year’s figures and add or subtract based on expected changes. In contrast, zero-based budgeting (ZBB) abandons any assumption that historical expenditure is justified. ZBB begins each budgeting cycle by assuming no activity or cost is automatically approved. Instead, every planned activity must be fully justified and prioritised for resources from the ground up.

For ACCA Performance Management students, understanding ZBB is essential. ZBB provides a systematic means for prioritisation, driving effective allocation of organisational resources in environments with discretionary spending, such as service functions or the public sector.

> **Key Term: zero-based budgeting (ZBB)**
> A budgeting approach that requires all activities and costs to be justified from a zero base each period, with no reference to previous budgets.
>
> **Key Term: decision package**
> A structured document that analyses, justifies, and costs an activity or service, allowing management to evaluate its necessity and rank it for funding within ZBB.

## **WHY ZERO-BASED BUDGETING?**

Organisations face tightening resources, rising scrutiny over spending, and frequent demands for improved efficiency. In these scenarios, incremental budgeting can lead to automatic carry-over of inefficiency, wastage, or unnecessary activities because existing expenditures are rarely challenged.

Zero-based budgeting obliges managers to demonstrate the value of each budgeted activity every period. By doing so, it encourages a mindset of continuous improvement, challenges old spending patterns, and ensures the allocation of resources reflects organisational priorities.

### When is ZBB Most Applicable?

ZBB is especially suited to:

- Areas with a high proportion of discretionary or non-essential expenditure
- Service departments or public sector organisations
- Periods of significant change or financial constraint

It is less suitable for functions where expenditure is clearly driven by operational necessity or contractual commitments.

## **THE ZERO-BASED BUDGETING PROCESS**

ZBB involves a structured, multi-stage process to ensure comprehensive justification and prioritisation of resources:

1. **Identify and define activities:** Managers break down their areas into discrete activities or services for which expenditure is needed.
2. **Prepare decision packages:** For each activity, a decision package is created. This details:
   - Goals and purpose
   - Methods of delivery (including alternatives)
   - Resources and costs required
   - Measures of performance or output
   - The impact if the activity is not undertaken
3. **Evaluate and rank packages:** Senior management reviews, compares, and ranks all decision packages using cost-benefit or value assessment.
4. **Allocate resources:** Available budget is allocated in priority order, starting from the highest-ranked package, until funds are exhausted.

> **Key Term: prioritisation**
> The systematic allocation of limited resources to activities or projects based on their relative ranking or value to organisational objectives.

## **PRIORITISATION IN ZERO-BASED BUDGETING**

Unlike incremental budgeting, ZBB forces choices: not every activity is guaranteed funding. Each decision package must earn its place by demonstrating value, efficiency, and alignment with strategy. As a result, some lower-priority activities may be reduced or discontinued altogether if funding is not available.

This prioritised approach increases organisational agility. Activities are not simply funded “because they've always been funded,” but based on demonstrable need and the potential benefit delivered.

> **Key Term: incremental budgeting**
> A traditional budgeting system that adjusts previous budgets for expected changes, often carrying forward past inefficiencies unchecked.

## **STRUCTURE OF A DECISION PACKAGE**

A well-constructed decision package in ZBB contains several essential elements:

- **Purpose and objectives:** What does the activity achieve?
- **Alternative delivery methods:** Are there more efficient or cost-effective ways to provide the same service?
- **Consequences of non-funding:** What would be lost if the activity is not funded at all?
- **Performance measures:** How will output or success be measured?
- **Cost breakdown:** Detailed costing of the proposed activity, including incremental levels where relevant.

There are two major types of decision packages:

- **Mutually exclusive packages:** Propose alternative ways of achieving the objective—only one will be chosen.
- **Incremental packages:** Present the base (minimum) level of service and describe the effect and cost of incremental increases above this base.

## **ADVANTAGES AND LIMITATIONS OF ZBB**

**Advantages:**

- Promotes a critical review of all spending, helping to identify and eliminate wasteful or obsolete activities
- Supports targeted resource allocation and strategic alignment
- Encourages involvement and accountability among managers

**Limitations:**

- Implementation can be resource-intensive, requiring significant time and analytical skill
- Ranking activities with qualitative or intangible benefits can be difficult
- May cause conflict or demotivation if not well managed, as managers may compete for limited resources

### **Worked Example 1.1**

A local authority runs several services: waste collection, library provision, and parks maintenance. Facing budget cuts, it implements zero-based budgeting.

**Question:** Outline how the authority might approach prioritisation for the 'library provision' activity under ZBB.

> **Answer:**
> The library manager would create a decision package justifying the existence, cost, and value added by library services. They would propose alternative delivery modes (e.g., opening hours, online access, voluntary staffing). The package would state the effect if the service was discontinued or reduced. Management would rank this alongside other services such as parks or waste collection and allocate available resources to the highest-priority packages.

### **Worked Example 1.2**

A university faculty wishes to fund six research projects, but the available budget only covers four. Each project is submitted as a decision package.

**Question:** How are projects selected for funding under ZBB?

> **Answer:**
> Each project’s decision package is evaluated on its objectives, costs, expected outcomes, and strategic value. All projects are ranked according to agreed criteria—such as potential research impact, essentiality, or external funding opportunities. The four highest-priority packages are funded, and the remainder postponed or cancelled due to resource limits.

### **Exam Warning**

> Failing to prepare clear, evidence-based decision packages can result in worthwhile activities being underfunded or omitted in ZBB systems. Ensure all required elements—such as purpose, alternatives, and performance measures—are documented.

## **Summary**

Zero-based budgeting systematically challenges existing spending by justifying every activity from a zero base. By requiring detailed decision packages and enabling critical prioritisation, ZBB directs resources to organisational objectives and supports efficiency. However, it may require significant managerial effort and skill in ranking diverse activities.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define zero-based budgeting and describe how it differs from incremental budgeting
- Explain and construct decision packages under ZBB
- Illustrate how prioritisation and ranking are achieved through evaluation of decision packages
- Identify advantages and disadvantages of zero-based budgeting
- Recognise where ZBB is suitable or unsuitable as a budget framework
- Apply ZBB process steps in a scenario for exam purposes

## **Key Terms and Concepts**

- zero-based budgeting (ZBB)
- decision package
- prioritisation
- incremental budgeting

Budget frameworks - Zero-based budgeting and prioritisation