Budgeting Methods - Incremental Budgeting

An incremental budget is a budget prepared using a previous period's budget or actual performance as a basis with incremental amounts added for the new budget period.

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

• This approach is not recommended as it fails to take into account changing circumstances

• Moreover it encourages "spending up to the budget" to ensure a reasonable allocation in the next period. It leads to a "spend it or lose" mentality.

Advantages of incremental budgeting

• The budget is stable and change is gradual.

• Managers can operate their departments on a consistent basis.

• The system is relatively simple to operate and easy to understand.

• 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

• Assumes activities and methods of working will continue in the same way.

• No incentive for developing new ideas.

• No incentives to reduce costs.

• Encourages spending up to the budget so that the budget is maintained next year.

• The budget may become out of date and no longer relate to the level of activity or type of work being carried out.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