Budget Setting: Incremental vs Zero-Based
Incremental budgeting
The previous period's budget (or actual figures) is taken as the starting point and adjusted for expected changes (inflation, volume changes, etc.).
Advantages
- Quick and simple to prepare
- Builds on known, established figures
- Less time-consuming for managers
Disadvantages
- Perpetuates existing inefficiencies — wasteful spending is carried forward
- Departments may over-spend to protect next year's allocation
- Does not challenge whether activities are still necessary
- Can be unrealistic if prior year was abnormal
Zero-based budgeting (ZBB)
Every budget starts from zero. All expenditure must be justified from scratch each period regardless of prior budgets.
Advantages
- Challenges all costs — wasteful spending is eliminated
- Encourages managers to think critically about resource use
- More accurate reflection of what is actually needed
- Identifies activities that no longer add value
Disadvantages
- Very time-consuming and expensive to prepare
- Requires significant management knowledge and effort
- Can cause conflict between departments competing for resources
- May not suit all types of organisation