Incremental budgeting

This is used to describe an incremental cost approach to budgeting where the next period budget is based on the current year’s results plus an extra amount (an increment) for estimated growth or inflation next period.

Incremental budgeting is sufficient only if current operations are effective, efficient and economical without an alternative course of action available to the organization. Although incremental budgeting is easy to prepare, it encourages slacks and wasteful spending to creep into budgets and become a normal feature of actual spending. It does not encourage performance to be improved or looking for alternative ways of carrying out the production.