Zero Based Budgeting Example

Zero based budgeting is the concept which is used in accounting; it refers to the practice where the budget for next period is automatically set at 0. A firm will then give funds according to need of a department and it is not predefined, it can be better understood with the help of an example.

Suppose the marketing department of a FMCG company had made expenses of $2000 in the promotion of a newly launched product in the previous quarter than according to traditional budgeting for next quarter the budget would have been either $2000 or more, but under zero based budgeting method the budget for next quarter would be set at 0 and hence marketing department cannot justify the budget on the basis of previous quarter because for a newly launched product you require more marketing. Hence the marketing department has to make new estimate rather than saying that increase the budget by 10 percent of previous quarter and if it wants 10 percent more than the previous quarter, which comes at $2200 then it has to justify it to the top management and then only allocations will be made.

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