Incremental budgeting is the traditional approach that comes out either from the actual results or previous budget and adjusts it for the expected changes.
It is the opposite approach to zero-based budgeting.
In general, incremental budgeting does not take into account the changes in assumptions or circumstances, but it may be appropriate for example for costs that are quite easy to quantify, e.g. wages and salaries.
Advantages of incremental budgeting
- easy and quick to prepare
- better coordination between departments
- works well if there are no overspendings or inefficiencies in the actual figures
Disadvantages of incremental budgeting
- usually does not consider any changes of methods and activities
- budget is based on the assumptions prepared a long time ago, which are currently often even no longer known
- dysfunctional behavior as managers tend to spend the remaining budget at the end of the year in order to keep the budget for the forthcoming period as well