American Institute of Certified Planners (AICP) Practice Exam

What is the fundamental principle of Zero Base Budgeting?

1. The budget is based on previous years' expenditures

2. The budget starts from a baseline established by historical data

3. The budget starts from scratch every year

4. The budget is designed to reduce overall spending

The correct answer is: The budget starts from scratch every year

Zero Base Budgeting (ZBB) operates on the fundamental principle that every budget cycle starts from a "zero base." This means that all budget items must be justified for each new period, rather than simply adjusting previous budgets based on historical expenditures. By starting from scratch each year, every department must build its budget afresh, evaluating needs and costs without the influence of past spending patterns. This process encourages a thorough review of all activities and expenditures, promoting efficient allocation of resources and enabling managers to prioritize funding based on current goals rather than historical circumstances. In contrast, approaches that rely on past expenditures, established baselines from historical data, or reductions in spending target previously determined budgets, do not align with the ZBB methodology. These alternatives can perpetuate inefficiencies or fail to adequately reflect current operational needs. Therefore, the essence of Zero Base Budgeting lies in its requirement for a comprehensive evaluation and justification of each budget item anew, ensuring funds are allocated effectively according to current priorities.