Certification in Supplier Diversity Practice Exam

What distinguishes a zero-based budget?

1. Based on previous year's data

2. Requires justification for all expenditures

3. Links directly to revenue generation

4. Focuses on long-term forecasting

The correct answer is: Requires justification for all expenditures

A zero-based budget is characterized primarily by the requirement for justification of all expenditures for each new budgeting period. Unlike traditional budgeting methods that often rely on historical data as a starting point, zero-based budgeting starts from a "zero base." In this approach, every function within an organization is analyzed for its needs and costs, and budgeting decisions are made from scratch rather than simply rolling over previous budgets. This method emphasizes accountability and helps ensure that all expenditures are necessary and aligned with current business objectives, rather than being justified by prior spending trends. It encourages efficiency, as it forces departments to thoroughly evaluate their needs and eliminates unnecessary expenses. While the other options touch on various aspects of budgeting, they do not accurately describe the core principle of zero-based budgeting. For instance, basing a budget on previous year's data reflects traditional budgeting methods, linking budget items directly to revenue generation is more relevant in performance-based budgeting, and a focus on long-term forecasting aligns more with strategic financial planning rather than the immediate justification requirement fundamental to zero-based budgeting.