The purpose of this essay is to evaluate how “Incremental budgeting is still the most popular form of budgeting because it works”. Firstly, this essay will explain the different types of budgeting. Secondly, the essay will compare and contrast incremental budgeting to zero-based budgeting (ZBB) and rolling budgeting. Finally, this essay will conclude to say where incremental budgeting is not the most popular form of budgeting.
Incremental budgeting is a traditional way of budgeting. It is budgeting process that uses previous year’s budget or the actual performance, which incremental amounts are added or subtracted to the new budgeting period. Incremental budgeting takes the fixed cost into consideration; it is a process where the firm uses current and historical budgets. This form of budgeting is typically used in the public sector or commercial organisations. Incremental budgeting is used where there is a certainty; businesses nowadays are not certain as there are lots of global competitions.
Incremental budgeting has advantages, it is simple to understand, which makes it easier for business to implement the system. In addition, this budget is stable and few alterations are made, which makes it easier to make predictions. Consequently, managers can operate their departments on a constant basis. Therefore, this shows that disagreement can be avoided.
On the other hand, there are disadvantages. This form of budgeting may become out of date, and not longer relate to the work that is being carried out. Therefore, this can distort the figures in the forecast. Managers can overestimate their figures to obtain a forecast which would be easier to work towards. In turn, this allows the managers to achieve a favourable result.
Another drawback could be that this budgeting method makes the business spend up to the budget so the company can ensure they get a reasonable allocation for the next budgeting period. For example, Brammer & Penning (2005) “a city council using incremental budgeting would continue to budget at the same level, increased for inflation, for hospitality and catering relating to meetings, visitors and so on”. In other words, this encourages business to spend more, even if the number of the meetings and visitors changed. Therefore, there would not be any incentive to look for a more cost-effective way to budget.
From figure 1 you can see how incremental budgeting is declining due to the new method that has been introduced which is ZBB.
However, Rehfuss (1977) states “there really is no generally accepted definition of ZBB”. On the other hand Horngren et al (1996) defines ZBB as a ‘budgeting from the ground up, as though the budget is being prepared for the first time with every proposed expenditure coming under review’. In other words, ZBB means each department starts with a budget of zero for each period. If the department needs a budget then they have to be put forward, assessed and prioritised. For example, the...