Explain the concept of "zero-based budgeting."

Zero-based budgeting is a financial planning approach where every expense within an organization must be justified for each new period, starting from a "zero base." This means that rather than simply adjusting the previous year’s budget, every budget cycle requires managers to reevaluate all their expenses and justify the need for each one, as if starting from scratch. The goal of this method is to ensure that all resources are allocated based on current needs and priorities, rather than historical spending patterns.

This approach encourages a more thorough examination of costs, fosters accountability, and helps organizations prioritize spending. It can lead to more efficient use of resources and the elimination of unnecessary expenditures. By assessing needs from zero, organizations can better align their budget with strategic goals and shift resources to areas that provide the greatest return on investment.

The other approaches mentioned do not capture the essence of zero-based budgeting. Preparing a budget based solely on previous budgets (the second choice) does not require justifications for new expenditures and does not encourage a re-evaluation of needs. Estimating expenses based on future revenue (the third choice) does not consider the justification for each line item. Lastly, considering only fixed costs (the fourth choice) ignores variable expenses, which are also essential for a comprehensive budgeting process.