MBA Accounting & Finance

Incremental budget

Basics:

• a budget prepared using a previous period’s budget or actual performance as a basis with incremental amounts added for the new budget period

and

• allocation of resources is based upon allocations from the previous period.

Advantages of incremental budgeting

• Relatively simple to use and easy to understand
• The budget is stable and change is gradual.
• Managers can operate their departments on a consistent basis.
• Conflicts should be avoided if departments can be seen to be treated similarly.
• Co-ordination between budgets is easier to achieve.
• The impact of change can be seen quickly.

Disadvantages Of incremental Budgeting

• Unlike zero based budget, incremental budgeting assume that the activities and methods of working will continue in the same way hence it fails to take into account changing circumstances.
• As it is merely a marking up the previous year budget, it’s too simple a method where it does not provide incentive for employees to develop new ideas/ to innovate.
• As it encourages spending up to the budget so that the budget is maintained next year. With this spend it or lose it mentality, cost cannot be reduced.
• The budget may become out of date and no longer relate to the level of activity or type of work being carried out.
• The priority for resources may have changed since the budgets were set originally.
• There may be budgetary slack built into the budget, which is never reviewed-managers might have overestimated their requirements in the past in order to obtain a budget which is easier to work to, and which will allow them to achieve favourable results.