ACCA Performance Management (F5) Certification Practice Exam

Why might an organization choose to use an incremental budget?

1. To reduce employee input

2. To adapt quickly to economic changes

3. To maintain stability in funding and management morale

4. To impose strict financial controls

The correct answer is: To maintain stability in funding and management morale

Organizations often opt for incremental budgeting to foster stability in funding and management morale. This budgeting approach involves making small adjustments to the previous budget, typically based on the last year’s figures. By doing so, it provides a sense of continuity and predictability in financial planning. Maintaining stability is crucial because it allows departments to operate effectively without the disruptions that might come from more radical budget changes. Employees are more likely to feel secure in their roles and responsibilities when they can expect their funding and resources to remain relatively consistent. This method can help nurture a positive working environment and sustain morale, as team members are less likely to face significant changes in their operational budgets year after year. Additionally, incremental budgeting encourages management to focus on the ongoing performance of existing projects rather than constantly re-evaluating priorities or funding levels. By recognizing the previous year as a baseline, organizations can manage expectations and ensure continued support for ongoing initiatives, thus facilitating smoother operational processes. While other budgeting approaches might emphasize flexibility or rigorous control, the choice of incremental budgeting aligns closely with the need for stability and steady management, which is why this option is seen as particularly advantageous in many situations.