Start with the previous period’s budget on actual results and add (or subtract) an incremental amount to cover inflation and other known changes. The traditional approach to budgeting is known as incremental budgeting. Incremental budgeting is a reasonable procedure if current operations are efficient and economical. It is also appropriate for budgeting for costs such as staff salaries, which may be estimated on the basis of current salaries plus an increment for inflation and are hence administratively fairly easy to prepare.
Advantages:
- It is quickest and easiest method of budget preparation.
- Assuming that the historic figures are acceptable, only the increment needs to be justified. The information is readily available, so very limited quantitative analysis is needed.
Disadvantages:
- Builds in previous problems and inefficiencies.
- Previous uneconomic activities may be continued.
- It encourages slack and wasteful spending to creep into budgets.
- Assessing the amount of the increment can be difficult.
- It is not appropriate in a rapidly changing business.
Incremental Budgeting
