Distinguish zero-based budgeting from incremental budgeting.

• A. Zero-based budgeting starts from zero each period and justifies all costs; incremental budgeting adjusts prior period costs by a set change.
• B. Zero-based budgeting uses only past data; incremental budgeting uses future projections.
• C. Zero-based budgeting is only for capital expenditures; incremental budgeting is for operating expenses.
• D. Zero-based budgeting ignores fixed costs; incremental budgeting includes them.

Answer: (A)

Zero-based budgeting starts from a clean slate each period, requiring every cost to be justified from zero rather than assumed from the previous period. This forces a thorough review of all activities and can reveal inefficiencies or obsolete expenditures, since nothing is taken for granted. Incremental budgeting, by contrast, uses the prior period’s budget as the baseline and applies a fixed change to each line item, so existing allocations are largely carried forward with only small adjustments. The distinction is that zero-based budgeting challenges every cost, while incremental budgeting maintains continuity with past spending and nibbles around the edges.