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Both zero based budgeting (ZBB) and activity based budgeting (ABB) are different from traditional methods of budgeting. In traditional budgeting, a firm typically bases its budget for one fiscal year on the budget for the past year. It makes small adjustments based on things like inflation or changes in revenue. This is called cost based budgeting.
ZBB goes about the budgeting process differently. ZBB, as its name implies, starts from zero. Instead of giving each department or each function of the firm a budget based on the past year, it reconsiders all of the firm’s activities and functions. Starting from zero, it analyzes them to see how much of a budget they really need. This prevents the firm from just putting money towards certain activities out of habit or inertia. It forces each function of the firm to justify its existence and its budget each year.
ABB is somewhat similar in that it is not cost based and it requires each function to justify itself each year. In the ABB process, each function of the firm is analyzed to see how it fits with the other functions and how it furthers the firm’s goals. This allows the firm to determine which of its functions are most important. It allows the firm to budget based on the importance of each function to the firm’s overall goals.
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