ACCA Performance Management (F5) Certification Practice Exam

Which of the following is an advantage of an incremental budget?

1. It allows for complete reevaluation of costs each year

2. It promotes employee motivation and stability

3. It is the most comprehensive budgeting approach

4. It encourages innovation and changes in spending

The correct answer is: It promotes employee motivation and stability

An incremental budget is characterized by its method of adjusting previous budgets by adding or subtracting a certain percentage or amount for the new budgeting period. One of the key advantages of this approach is its ability to promote employee motivation and stability. By using an incremental budgeting process, employees typically feel more comfortable and secure because their input and the base budget they are familiar with are maintained with minor changes. This consistency encourages employee engagement and satisfaction, as there is less disruption in their work environment and they understand the financial framework in which they are operating. Furthermore, incremental budgets base their forecasts on historical data, which provides a sense of stability and predictability, helping employees plan their activities more effectively. In contrast, a complete reevaluation of costs each year can lead to uncertainty and resistance among employees, as they may find it challenging to adjust to a completely new budget. The incremental method does not encompass comprehensive evaluations or encourage innovation to the extent that alternative budgets might, as its focus is on continuity rather than change.