Which method should ABC Builder use to budget their overheads for the next fiscal year?

Starting with zero and building each cost category based on actual needs is an effective approach for budget planning, particularly for a company like ABC Builder. This method, known as zero-based budgeting, involves scrutinizing each expense, rather than simply adjusting the previous year's budget or relying on historical averages. It compels the organization to justify all costs for each new period, based on actual operational needs and strategic goals.

Using this method encourages a thorough examination of all expenditures and promotes fiscal discipline, as it prevents the assumption that past expenses will necessarily repeat in the future. By evaluating the current requirements and aligning budget allocations with those needs, ABC Builder can better manage its resources, minimize waste, and adapt to any changes in the market or operational conditions. This proactive approach also fosters greater accountability among departments, as they are required to demonstrate the value of their requested budgets.

While historical averages, standard percentage comparisons, and copying the previous year's budget can provide a quick overview and are sometimes used for their simplicity, they may not accurately reflect current circumstances or the specific financial realities that ABC Builder may face in the upcoming fiscal year.