ACCA Performance Management (F5) Certification Practice Exam

What defines an incremental budgeting system?

1. A system that eliminates previous year's values entirely

2. A system that adjusts budgets based on previous years’ figures

3. A system that prepares budgets without historical data

4. A system that sets budgets based purely on market trends

The correct answer is: A system that adjusts budgets based on previous years’ figures

An incremental budgeting system is characterized by its reliance on the previous year's budget as a foundation for the new budget. This approach involves making adjustments—either increases or decreases—to the existing budget figures based on various factors such as anticipated changes in costs, revenues, or operational needs. The rationale behind this method is its simplicity and ease of implementation; it allows organizations to create budgets by building on a known baseline, which can be particularly helpful in stable environments where expenditures do not fluctuate wildly from year to year. In incremental budgeting, typically, only the amounts that are expected to change are modified, such as new initiatives, inflation-related adjustments, or cost-saving measures that the organization aims to implement. This minimizes the effort and complexity of budget preparation compared to systems that start from scratch each year. Organizations often find this method practical because it reflects continuity and incremental adjustments rather than radical changes. In contrast, a system that eliminates previous year's values entirely would represent a zero-based budgeting approach, which focuses solely on the justification of new expenses without considering prior budgets. Preparing budgets without historical data lacks a foundation for informed decision-making, while setting budgets based purely on market trends may ignore internal operational details and historical performance, leading to less accurate forecasting.