Question

Differentiate between the incrementalism and zero-based approaches to budgeting

Answer 1

Answer - Following are the differences between incremental and zero based budgeting-

•Incremental budgeting refers to the budgeting where the new budgets for the year are created by considering the budgets of previous year and also allocation od resources or funds is done on a basis of previous year distribution pattern. While in zero based budgeting the new budgets are prepared on a new period basis ie., the expenses or other variables are not estimated on some previous year basis and hence in this different functions are analysed and new budgets are planned accordingly.

• In zero based budgeting the planning and allocation is done on the basis of new plans and more resources are allocated to those divisions of business which generate more revenue. While this is not the case in case of incremental budgeting as estimation of expenses and allocation is done on a pre estimated basis.

• Wasteful expenditure doesn’t happen in zero based budgeting as the budgeting for the new period is done on the basis of cost benefit analysis and thus more resources are allocated according to efficiency level. While incremental hudgeting follows the pattern of budgeting that was following in the previous years and hence no such cost benefit analysis is considered.

• Zero based budgeting is much more time consuming than the incremental budgeting as it requires careful planning of estimation according to the plans. While in case of increment budgeting the time consumption is very less as watimation is already done and ratios are also decided as per previous budget plans.

•Making of zero based budgeting requires careful planning and intellectual minds as new ratios must be decided so that there is proper allocation of expenses according to the set targets. But no such intellectual mind is required in incremental budgeting as everything is done according to previous budget(s).