Short answer: zero-based budgeting (ZBB) means every cost must be justified from zero each period. Incremental (traditional) budgeting takes last year's budget and adjusts it, often by a percentage. ZBB can cut waste, but it takes more time and skill. Budget variances then compare actual results with the budget, and each one is adverse or favourable.
What the 7138 specification asks
In the finance section (3.1.4), AQA asks you to understand the purpose and value of budgeting, including zero-based budgeting. You must also calculate budget variances and say whether each is adverse or favourable [1].
Zero-based budgeting is new to 7138. It does not appear in the old 7132 specification. Budgets and variances are not new, so expect exam questions that ask you to compare the two methods. For the full list of changes, see AQA A-Level Business is changing.
What a budget is for
A budget is a financial plan for a future period, usually a year. It sets targets for income and limits for spending. Budgets do four jobs:
- Planning: managers think ahead about what they need.
- Control: spending stays within agreed limits.
- Coordination: departments work towards the same plan.
- Motivation and review: staff have targets, and managers can compare results with the plan.
Zero-based budgeting versus incremental budgeting
Most organisations use incremental budgeting. The manager starts from last year's figure and adds or removes a small amount. It is quick and simple. The weakness is that old spending is rarely questioned. A cost that made sense five years ago can roll forward every year.
Incremental budgets can also cause "use it or lose it" behaviour. A manager who underspends may get a smaller budget next year. So some managers spend the rest of the money before the year ends, even if they do not need to.
Zero-based budgeting starts each budget at £0. The manager must explain why each activity is needed and what it will achieve. Activities with a weak case are cut, and the money can move to better uses.
| Incremental budgeting | Zero-based budgeting | |
|---|---|---|
| Starting point | Last year's budget | £0 |
| Main question | How much more or less than last year? | Why do we need this at all? |
| Time and cost to prepare | Low | High: every line is reviewed |
| Effect on waste | Old waste can continue | Waste is more likely to be found |
| Suits | Stable firms with predictable costs | Firms under cost pressure or changing strategy |
| Main risk | Complacency | Short-term cuts to things that pay off later, such as training |
A worked example (illustrative)
The figures below are illustrative only. They describe an imaginary bakery chain, not a real firm. Last year its marketing department spent £120,000: £30,000 on leaflets, £25,000 on local radio, £35,000 on social media adverts, £20,000 on trade shows and £10,000 on an agency.
Incremental: the finance team adds 4% to every line. The new budget is £120,000 × 1.04 = £124,800. Nobody asks whether the radio adverts work.
Zero-based: the marketing manager must justify each line from £0. Radio and trade shows cannot show any link to sales, so they get £0. Leaflets are kept only for new shop openings, at £10,000. Social media adverts can be tracked, so they rise to £55,000. The agency keeps £10,000, and a new loyalty app gets £15,000. The total is £90,000.
Notice two things. ZBB cut the total by £34,800 compared with the incremental budget. But it also raised spending on the activity with the clearest return. ZBB is about value, not only cuts.
How to calculate budget variances
A variance is the difference between the budgeted figure and the actual figure. The rule depends on whether the line is revenue or cost:
- Favourable (F): revenue is higher than budget, or costs are lower than budget. Profit is higher than planned.
- Adverse (A): revenue is lower than budget, or costs are higher than budget. Profit is lower than planned.
Here is one quarter for the same imaginary bakery. Again, the figures are illustrative only.
| Item | Budget | Actual | Variance |
|---|---|---|---|
| Sales revenue | £400,000 | £380,000 | £20,000 A |
| Ingredient costs | £120,000 | £126,000 | £6,000 A |
| Wages | £150,000 | £146,000 | £4,000 F |
| Marketing | £22,500 | £20,000 | £2,500 F |
| Profit | £107,500 | £88,000 | £19,500 A |
Check your work: the variances add up to the profit variance. Two adverse (−£26,000) and two favourable (+£6,500) give £19,500 adverse. In the exam, never write a variance without the A or F label.
A favourable variance is not always good news. Lower wages might mean fewer staff and slower service. An adverse cost variance might simply follow higher sales. Always ask why the variance happened.
Zero-based budgeting in the real world
The UK government, June 2025. HM Treasury published Spending Review 2025 on 11 June 2025. It describes the review as "the first zero-based review (ZBR) in 18 years" [2]. Every department went through its accounts line by line to find the spending with the lowest value for money [2]. All departments will deliver at least 5% savings and efficiencies by 2028-29. Administration budgets will fall by at least 16% in real terms by 2029-30, an expected saving of £2.2 billion in that year [2].
Unilever, April 2017. On 6 April 2017, Unilever, the consumer goods group, set out the results of a review of its strategy [3]. It said it was driving efficiency in its cost base through zero-based budgeting. It raised its target for three-year savings in overheads and brand and marketing spending from over €1 billion to €2 billion. It also targeted a 20% underlying operating margin by 2020, up from 16.4% in 2016 [3].
Both cases share a pattern. ZBB was used under pressure: tight public finances in one, a push for higher margins in the other. That is a useful line for evaluation.
Practice question, in our own words: Assess whether a large UK retailer should replace incremental budgeting with zero-based budgeting for its head-office costs.
Analysis: ZBB forces each head-office manager to justify every cost from £0. So spending that no longer adds value, such as an old software licence, is more likely to be found and cut. Because head-office costs do not earn revenue directly, the savings go straight to profit. Therefore the retailer could cut prices or invest more in its shops.
Evaluation: However, ZBB takes a lot of manager time each year, and that time has a cost. The benefit depends on how much waste exists. A retailer that has used incremental budgets for many years is likely to gain more than one that reviews costs often. A sensible judgement: run a full ZBB review now, then use incremental budgets with regular checks. The UK government's 2025 review was its first in 18 years [2], so even large organisations use ZBB from time to time, not every year.
Notice the structure. The analysis is a chain joined by "so", "because" and "therefore". The evaluation names what the answer depends on and ends with a clear judgement.
Practise budgets and variances
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Sources
- AQA (2025). AS and A-level Business 7137/7138 specification, version 1.0, October 2025.
- HM Treasury (2025). Spending Review 2025, 11 June 2025.
- Unilever PLC (2017). Unilever review outcome, RNS announcement, 6 April 2017.