What is Incremental Budgeting?

Incremental budgeting, also known as incrementalism or incremental budgeting process, is a budgeting approach in which the budget for a given period is primarily based on the previous period’s budget or actual results, with incremental adjustments made for changes or additional requirements.

Here are key features and characteristics of incremental budgeting:

  1. Baseline from Previous Period: Incremental budgeting starts with the budget figures from the previous period as a baseline. It serves as the starting point for developing the current period’s budget.
  2. Incremental Adjustments: The budget figures are adjusted incrementally to account for changes in circumstances, such as inflation, volume changes, anticipated growth, or known cost increases. These adjustments are typically based on historical trends or expected changes in costs and revenues.
  3. Historical or Traditional Approach: Incremental budgeting follows a traditional approach, assuming that the previous period’s budget or actual results are a reasonable benchmark for the current period. It relies on the assumption that ongoing activities and resource requirements will largely remain consistent unless there are significant changes.
  4. Limited Scrutiny of Existing Spending: Incremental budgeting often involves a limited examination or scrutiny of existing spending patterns. It assumes that the current allocation of resources is appropriate unless there is a compelling reason to make significant changes.
  5. Emphasis on Stability and Predictability: Incremental budgeting provides stability and predictability in budgeting by maintaining continuity with the past. It minimizes the disruption caused by frequent budget revisions or significant departures from the previous budget.
  6. Less Focus on Zero-Based Budgeting: Unlike zero-based budgeting, which requires justifying all budgeted amounts from scratch, incremental budgeting assumes that existing activities and expenditures are justified unless proven otherwise. It primarily focuses on incremental adjustments rather than reevaluating the entire budget.
  7. Limited Resource Reallocation: Incremental budgeting may result in limited resource reallocation, as it tends to maintain the existing allocation of resources. This can potentially hinder the ability to allocate resources efficiently and effectively to areas with the highest priority or need.

Incremental budgeting can be useful in situations where there is stability, limited changes in the operating environment, and a desire to maintain continuity in resource allocation. It offers simplicity and efficiency by building upon existing budgets and avoiding extensive budgeting processes from scratch. However, it may also lead to budgetary slack, inertia, and missed opportunities for cost savings or resource optimization.

To address potential drawbacks, organizations can complement incremental budgeting with other budgeting techniques or incorporate regular review and scrutiny of existing spending to ensure ongoing resource efficiency and alignment with organizational goals.

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Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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