What defines a zero-based budget?

A zero-based budget is characterized by the requirement that all expenses must be justified for each new period. This budgeting approach starts from a "zero base," meaning that every function within an organization is analyzed for its needs and costs, and all activities must be evaluated and approved for funding, regardless of prior budgets.

This method encourages a thorough examination of needs and expenditures, allowing the organization to allocate funds based on current requirements rather than on historical spending patterns. By justifying every expense, organizations can identify and eliminate wasteful spending, prioritize goals, and ensure that resources are being used effectively in alignment with current strategies.

In contrast, the other choices outline different budgeting concepts. A budget starting from a surplus would involve a different framework where excess funds are considered prior to setting new spending priorities, while only including variable costs limits the focus to a specific type of expense. Lastly, a budget based on previous year’s figures suggests a traditional incremental approach, where past budgets influence current planning without the necessity of reevaluating every item afresh. Thus, the essence of a zero-based budget lies in its emphasis on justifying all expenses, promoting a more strategic and thoughtful allocation of resources.