Incremental budgeting is the process whereby this year’s budget is set by reference to last year’s actual results after an adjustment for inflation and other incremental factors. Incremental budgeting is usually practices in organizations operating in stable environment or for transactions which can not be avoided such as electricity bills and salaries.
In incremental budgeting the last year budget figures are taken as they are with addition of this year’s expected changes and the inflation.
The following are disadvantages of incremental budgeting
- It is not appropriate in rapidly changing business;
- Assessing the amount of increment can be difficult;
- It builds on wasteful spending. if the actual figure for this year includes over expenditure caused by some form of error, then the budget for next year would potentially include this over expenditure again.
- Incremental budgeting can ignore the true drivers of costs leading to poor budgeting.
- It encourages organizations to spend up to the maximum allowed in the knowledge that if they do not do this they will not have as much to spend on the following year’s budget.
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