ACCA Performance Management (F5) Certification Practice Exam

What is the key characteristic of an incremental budget?

1. It starts from zero each period

2. It adds incremental amounts to cover known changes

3. It requires justification for every cost

4. It is constantly updated throughout the year

The correct answer is: It adds incremental amounts to cover known changes

An incremental budget is primarily characterized by its approach to budgeting based on the previous period's budget or actual results, with adjustments made to accommodate known changes for the upcoming period. This approach allows organizations to take the last budget as a base and simply add or subtract amounts for anticipated changes such as inflation, changes in staffing, or new projects. By focusing on incremental amounts, organizations can streamline the budgeting process, making it less time-consuming than approaches that require building the budget from scratch or justifying every line item. The incremental budgeting method still allows for flexibility and responsiveness to changes, while acknowledging the baseline established in previous periods. This is why the choice related to adding incremental amounts to cover known changes accurately defines the key characteristic of an incremental budget, highlighting its practical and straightforward nature in business financial planning.