216176
Description
Mind Map by Shahid Musthafa, updated more than 1 year ago
|
Created by Shahid Musthafa
almost 11 years ago
|
|
Incremental
Budgeting
- Incremental budgeting is budgeting based
on slight changes from the preceding
period's budgeted results or actual results.
- where it is
used ?
- It is suitable for stable businesses,
where costs are not expected to
change significantly. There should
be good cost control and limited
discretionary costs.
- This is a common approach in
businesses where management
does not intend to spend a great
deal of time formulating budgets,
- or where it does not
perceive any great need to
conduct a thorough
evaluation of the business.
- It is suitable for stable businesses,
where costs are not expected to
change significantly. There should
be good cost control and limited
discretionary costs.
- incremental budgeting results in such a conservative
mindset in a business that it may actually be a noticeable
driver in destroying a company over the long term. You
should instead engage in a thorough strategic
re-assessment of a business when constructing a
budget, as well as a detailed investigation of
expenditures. The result should be significant changes in
the allocation of funds from period to period, as well as
targeted operational changes that are intended to
improve the competitive position of a business.
- where it is
used ?
- ADVANTAGES
- Simplicity
- The primary advantage is the simiplicity of
incremental budgeting, being based on
either recent financial results or a recent
budget that can be readily verified.
- The primary advantage is the simiplicity of
incremental budgeting, being based on
either recent financial results or a recent
budget that can be readily verified.
- Funding stability
- If a program requires funding for
multiple years in order to achieve a
certain outcome, incremental
budgeting is structured to ensure
that funds will keep flowing to the
program.
- If a program requires funding for
multiple years in order to achieve a
certain outcome, incremental
budgeting is structured to ensure
that funds will keep flowing to the
program.
- Operational stability
- This approach ensures that departments are
operated in a consistent and stable manner
for long periods of time.
- This approach ensures that departments are
operated in a consistent and stable manner
for long periods of time.
- Simplicity
- DISADVANTAGES
- Incremental in nature
- It assumes only minor changes from the
preceding period, when in fact there may be
major structural changes in the business or
its environment that call for much more
significant budget changes.
- Uneconomic activities may be continued.
E.g. the firm may continue to make a
component inhouse when it might be cheaper
to outsource.
- Uneconomic activities may be continued.
E.g. the firm may continue to make a
component inhouse when it might be cheaper
to outsource.
- It assumes only minor changes from the
preceding period, when in fact there may be
major structural changes in the business or
its environment that call for much more
significant budget changes.
- LACK OF Risk taking
- Since an incremental budget allocates most funds to
the same uses every year, it is difficult to obtain a
large funding allocation to direct at a new activity.
Thus, incremental budgeting tends to foster a
conservative maintenance of the status quo, and does
not encourage risk taking.
- Since an incremental budget allocates most funds to
the same uses every year, it is difficult to obtain a
large funding allocation to direct at a new activity.
Thus, incremental budgeting tends to foster a
conservative maintenance of the status quo, and does
not encourage risk taking.
- Fosters overspending
- It fosters an attitude of "use it or lose
it" in regard to budgeted expenditures,
since a drop in expenditures in one
period will be reflected in future
periods, too.
- Managers may spend unnecessarily to use
up their budgeted expenditure allowance this
year, thus ensuring they get the same (or a
larger) budget next year.
- Managers may spend unnecessarily to use
up their budgeted expenditure allowance this
year, thus ensuring they get the same (or a
larger) budget next year.
- It fosters an attitude of "use it or lose
it" in regard to budgeted expenditures,
since a drop in expenditures in one
period will be reflected in future
periods, too.
- Budgetary slack
- Managers tend to build too little
revenue growth and excessive
expenses into incremental budgets,
so that they will always have favorable
variances.
- Managers tend to build too little
revenue growth and excessive
expenses into incremental budgets,
so that they will always have favorable
variances.
- Incremental in nature
Want to create your own Mind Maps for free with GoConqr? Learn more.