Business – 5.5 Budgets – Meaning and purpose of budgets | e-Consult
5.5 Budgets – Meaning and purpose of budgets (1 questions)
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Definition: An incremental budget is prepared by taking the previous period’s actual or approved budget as a base and adjusting it by a fixed amount or percentage to reflect expected changes such as inflation, price rises, or planned growth.
Advantages:
- Simple and quick to prepare, requiring minimal analysis of each cost element.
- Provides stability and continuity, making it easier for departments to plan around known expenditure patterns.
Disadvantages:
- Encourages a “spend‑what‑you‑got” mentality, reducing incentives to seek cost efficiencies.
- May perpetuate past inefficiencies because each line item is simply rolled forward without critical review.