ACCA Performance Management (F5) Certification Practice Exam

Which budgeting approach allows managers to adjust amounts based on inflation and changes?

1. Zero-based budgeting

2. Rolling budgeting

3. Participatory budgeting

4. Incremental budgeting

The correct answer is: Incremental budgeting

Incremental budgeting is a budgeting approach that allows managers to adjust amounts based on inflation and other changes. This method typically takes the previous year's budget as a base and makes incremental adjustments for the new budget period. These adjustments can account for factors such as inflation, increased costs, or changes in business priorities, which are essential for creating a realistic and relevant budget. For example, if a company faced a 5% inflation rate, it could increase its previous year's budget by a similar percentage to ensure that it accurately reflects the current economic environment. This approach is straightforward and easy to implement, making it a popular choice among many organizations. In contrast, other budgeting methods such as zero-based budgeting begin from scratch and require justifications for all expenses, making them less flexible regarding adjustments for inflation. Rolling budgeting continuously updates budgets at regular intervals, which can be an effective strategy but does not directly emphasize adjustments based on prior spending levels. Participatory budgeting involves engaging employees at various levels for input, which may enhance commitment but does not inherently focus on adjusting for economic changes. Therefore, incremental budgeting stands out as the method that specifically allows for these types of adjustments in a straightforward manner.