Question

Discuss the advantages/disadvantages of incremental/decremental budgeting and zero-based budgeting.

Answer 1

In incremental or decremental budgeting previous year's budget is used as the basis to formulate current budget. Sometimes incremental amounts are also added to the the previous year's actuals to formulate new budget. Some of the advantages of this type of budget is that the change is gradual and stable. The departments can be run smoothly by the managers on consistent basis. The impact of any kind of changes can be seen quickly as it is easier to achieve co-ordination between the budgets and actuals. The major disadvantage of this kind of budget is that it does not take the present circumstances into consideration and henceforth, similar activities and working methods continue to be taken into account every year, there is no or very less incentives for new ideas and the cost levels also remains to be same.

Preparation of budget from scratch without considering the last budgets is known as zero based budgeting. It involves deep scrutiny of cash flows and justification of all the expenditures to be incurred by the departments of the organization. Since it is made from scratch with relooking each and every items of cashflow, the major advantage of zero based budget is the level of accuracy and efficiency it possess. This type of budget is cost effective and reduces major redundancies. The major disadvantages of the zero based budget is that it is very time consuming and also manpower consuming.