Before an annual budget is prepared, a base should be chosen from which the process will begin. The traditional approach is to base the current budget on the current year’s results plus an extra amount for estimated growth or inflation for the next period. This method is known as incremental budgeting. Incremental budgeting is appropriate if current operations are as effective, efficient and economical as possible. It is however considered to be a weak approach to budgeting because it encourages slack and wasteful spending on non essential activities. Through incremental budgeting, past inefficiencies are perpetuated.
- It assumes that the basic structure of the budget will remain unchanged
- It focuses on only the existing uses of the resources
- To ensure that inefficiencies are not concealed in the budgets, an alternative approach to budgeting called zero based budgeting is employed