Budgeting: Incremental Budget

November 13th, 2006 Comments off
Share |

There are a few traditional methods of preparing budgets.

One of it is the using of Incremental Budget.

This article discusses what are an Incremental Budget and the pros and cons.

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  • The budget may become out of date and no longer relate to the level of activity or type of work being carried out.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.

 

Comments are closed now.

Financial Accounting

 
 

Advertise Here | Brain Teasers/Puzzles | Greeting Cards | Inspirational Quotes | Jokes/Humor | Useful Links | Motivational Stories | Resource | Shopping | Share/Express Your Views | Testimonials | Universities/Colleges | Words of Wisdom from Religions | FREE POSTING OF ACCOUNTING & FINANCE JOBS VACANCY|