Zero-based Budgeting (ZBB) is a financial planning tool which integrates management structures with the budgeting exercise. In conventional budgeting, the current year's budgets are prepared based on past performance. ZBB, on the other hand, questions set assumptions and provides a tool for systematic review of the planning parameters.

The ZBB process consists of identifying decision packages and then ranking them in order of importance through a cost-benefit analysis. Therefore, ZBB can be used for activities, functions or operations where a cost-benefit relationship can be identified, even if this evaluation is highly subjective. According to the ZBB system, justification of the expenditure may be required on the basis of expected output. So, while ZBB may be applicable to only a portion of the total budgeting effort in an enterprise, those areas to which it is directly applicable are usually the hardest to plan and control. Thus, ZBB is more applicable in the discretionary cost areas.

The term `decision packages' used in ZBB focuses on the analysis of each activity in the manufacturing process according to the incident of the relevant cost and the importance of that activity in the overall cost structure of the organization. Thus, in essence, decision packages refer to not only the cost but also the benefits of an activity in a process.

The Accounting World Magazine, Zero-Based Budgeting, ZBB, Financial Planning, Budgeting Techniques, Organizational Objectives, Decision-Making Process, Management Styles, Operating Management, Performance Budgeting, Accounting System.