ACCA Performance Management (F5) Certification Practice Exam

What is the main goal of incremental budgeting?

1. To create a brand new budget each year from scratch

2. To ensure consistent budgeting year over year

3. To reduce the total budget by half each year

4. To ensure all spending is justified annually

The correct answer is: To ensure consistent budgeting year over year

The main goal of incremental budgeting is to ensure consistent budgeting year over year. This method involves taking the previous year's budget as a base and making small adjustments for the upcoming budget period. These adjustments might reflect changes in cost, expected revenue, or business activities without requiring a complete re-evaluation of all budget items. By using a prior budget as a foundation, incremental budgeting promotes stability and predictability in financial planning, allowing organizations to manage their operations with a clear understanding of previous spending patterns. While the other options suggest different budgeting approaches, they do not align with the incremental budgeting philosophy. Creating a brand new budget from scratch (the first option) introduces significant variability and requires thorough justification, which is contrary to the incremental approach of making minor adjustments. Reducing the total budget by half each year (the third option) could significantly disrupt operations and is not a practical budgeting strategy. Ensuring all spending is justified annually (the fourth option) aligns more closely with zero-based budgeting, where all expenses must be re-evaluated each period, instead of the incremental method where past budgets are simply modified.