In: Finance
The principal negative consequence of incremental budgeting is that money may be allocated to a unit in the future merely because the unit had been allocated money in the past.
True or False
ANSWER
TRUE
Incremental budgeting can result in unnecessary spending for a company. The reason behind this is that the departments within a company generally tend to spend all the money that they’ve been allocated in a budget one year in order to obtain a greater amount of money in the next budgeting period. Incremental budgeting takes the position of increasing each part of the budget by a certain amount each year. However, some departments may not, in fact, need more money each year – but they will be allotted an increase anyway, simply because that’s how the budgeting process works. In this way, the budgeting process may be wasteful and less than optimally efficient.