This is where the current budget and actual figures act as the starting point or base for the new budget. The base is adjusted for forecast changes to, for example, the product mix, sales volume, sales price, expenses and capital expenditure that are expected to occur over the next budget period. It is called incremental budgeting as the approach does not focus on the base, but focuses on the increment (the changes from the base). An example would include increasing last years operating expenses by the rate of inflation to calculate the new budgeted figure. The major disadvantage of this is that the major part of the expense (the base) does not change and in fact is overlooked and not questioned under this approach. For example the base figure may be distorted due to extraordinary events in the previous period which are not expected to reoccur. Thus if this is not taken into account, the budget could be misleading.
Advantages of Incremental Budgeting
Easy to implement
If you are looking for a budget that is very simple to implement, incremental budgeting might be for you. You do not have to send your department managers to any special type of training in order to utilize this budgeting system. It is easy to learn and the process can be completed within a very short period of time. Gradual Change
One of the benefits of incremental budgeting is that it allows gradual change for the business. If you value gradual change instead of trying to change everything quickly, this type of budget is ideal. Many times, if your business tries to change too fast, it can become unstable and lose sight of what it does best. There are some other benefit regarding the incremental budgeting: * Flexibility--This type of budgeting is very flexible. You can easily do it from one month to the next. This allows you to see change very quickly when you implement a new policy or budget. * Avoid conflict--Companies with many different departments often run into conflict between departments because of their different budgets. With this method of budgeting, it is easier to keep everyone on the same page and avoid conflicts between departments. * The model operates under a stable and predictable system and any change will be gradual. * Managers can operate their departments on a consistent basis. * Conflicts should be easily avoidable if departments can be seen to be treated similarly. * It is Appropriate where there is a large number of cost centres/budgets to calculate and forecasts do not change significantly from one year to the next * Co-ordination between forecasts is easier to achieve.
* The impact of change can be seen quickly.
Disadvantages of Incremental Budgeting
* It assumes that activities and methods of working will continue in the same way. * It allows no proper incentive for managers to develop new innovative ideas. * Its normally on an upward trend, hence providing no incentive for managers to reduce costs. * It encourages spending up to the budget limits so that future estimates are maintained next year. * The forecast may become out of date and no longer relate to the level of activity or type of work being carried out. * The priority for resource allocation may have changed ever since the prior estimates were originally set. * May perpetuate past inefficiencies. In other words incremental...