Incremental budgeting is the process whereby this year’s budget is set by reference to last years actual results after an adjustments for inflation and other incremental factors.
The following are disadvantages of incremental budgeting:
- It is not appropriate in rapidly changing business;
- Assessing the amount of increment can be difficult;
- It builds on wasteful spending. if the actual figure for this year include over expenditure caused by some form of error, then the budget for next year would potentially include this over expenditure again.
- Incremental budgeting can ignore true drivers of costs leading to poor budgeting.
- It encourages organizations to spend up to maximum allowed in knowledge that if they do not do this they will not have as much to spend on the following year’s budget.