Zero Based Budgeting and Activity-Based Budgeting are the most popular budgeting methods. The selection of preferred budgeting method depends on the functioning and suitability of an organization. Before understanding the differences, let’s learn about zero-based vs. activity-based budgeting.
Meaning of Zero Based and Activity Based Budgeting
Zero-based budgeting method starts right from scratch. The current year’s budgets are prepared without considering the previous year’s budgets. The expenses incurred in each year must be justified. The vitality of projects determines the resource allocation. The aspect which is critical for the survival of a business and yields more profits gets the first priority.
Activity-based budgeting uses an activity-based costing methodology to prepare the budgets. It does not consider past year’s budgets to prepare the current year’s budget. Here, the budget is prepared after conducting the study of activities that incur the cost. The outcome of this research determines resource allocation.
Zero Based Vs. Activity Based Budgeting
The following points highlight the points of difference between zero-based budgeting and activity-based budgeting.
Basis for Budget Preparation
Zero-based budgets are prepared right from the beginning without considering last year’s budget. This budgeting method allocates resources based on the needs and costs of the department. On the other hand, activity-based budgeting does not consider last year’s budget, but the resources are allocated on the basis of efficiencies in business operations.
In zero-based budgeting, the ranking of activities of the business is on the basis of their vitality. Only after the expenses incurred are justified resources allocation happen towards an activity. On the other hand, in the case of activity-based budgeting, after justifying the cost drivers, the departments allocate the resources.
Zero-based budgeting reconsiders all the business activities every year and allocates money only to those activities that justify the expense. Hence, eliminating unnecessary activities results in cost savings. In activity-based budgeting, analysis of each business function takes place, keeping in view the functions and goals of the business. It eliminates those functions that do not go well with any other function. Hence, it leads to further cost-saving.
Link to Business Objectives
In zero-based budgeting, revaluation of the programs is done. That becomes the base for resource allocation. On the other hand, activity-based budgeting allocates resources after recording the relationship of business functions with the business objectives.
Zero-based budgeting is based on the justification given for each expense related to an activity. It does not lead to determining the potential profitability of the business. At the same time, activity-based budgeting aligns business activities with goals. This helps to know the potential profitability.
Zero-based budgeting is function-oriented, whereas activity-based budgeting is activity-oriented.