Everybody needs a budget plan to maintain their expenditure. Several types of budgeting techniques are available which help a person or a company to maintain or control their expenses and to know their profits or losses at the end of the year or month. With the help of budgeting, you can also get to know about your spending or whether you will be able to do the things with the amount of money that you have.
Incremental Budgeting and Zero-Based Budgeting are two types of budgeting methods that allow a person or a company to balance their expenses with their income or financial turnover. Where Zero-Based Budgeting prefers the bottom-up approach and starts from a zero base. While Incremental Budgeting uses a top-down approach and starts with the last period’s actuals.
Incremental Budgeting vs Zero-Based Budgeting
The main difference between Incremental Budgeting and Zero-Based Budgeting is that Incremental Budgeting uses a method in which a budget plan is made with the help of previous periods’ data actuals along with the addition of incremental amounts. While Zero-Based Budgeting starts from zero bases, and every expense made must be reevaluated and justified from scratch.
Incremental Budgeting is altering the existing budget plan or doing premise changes for arriving at a new budget plan. This method is not easy to implement and the calculations made are complex. It is suitable for those companies or organizations where the funding requirement is not varying or usually fixed. And the changes made to the budget plan are seen immediately.
Zero-based Budgeting starts everything from scratch. Where each line item is set at zero every year, and every line item is reviewed or justified each year. It ensures funding stability and uses a top-down approach. This method does not contain complex calculations and is easy to apply. The operation approach of this budgeting method can be both vertical as well as horizontal.
Comparison Table Between Incremental Budgeting and Zero-Based Budgeting
| Parameters of Comparison | Incremental Budgeting | Zero-Based Budgeting |
| Definition | Incremental Budgeting is making a budget plan using the last period’s actuals and adding the amount in an increment manner for the further budget. | Zero-Based Budgeting is a method where you need to mention all income and costs for every year of the accounting period. |
| Open to suggestions | Incremental Budgeting is less reactive when it comes to market changes or fluctuations. | Zero-Based Budgeting is very adaptive when it comes to integrating changes in the market. |
| Cost and time | Incremental Budgeting uses more time, but it is economical or cost-efficient. | Zero-Based Budgeting is time-consuming as well as expensive because it covers every detail. |
| Approach | Incremental Budgeting mainly keeps track of the expenditures or spending. | Zero-Based Budgeting usually monitors the acquirement of the intent or objective. |
| Importance | It is accounting-oriented and focuses only on the cost. | Zero-Based Budgeting is decision-oriented. |
| Procedure | Incremental Budgeting is based on extrapolation. That is, future projections are carried out from the previous figures. | The zero-Based Budgeting decision package is based on cost-benefit analysis. |
What is Incremental Budgeting?
Incremental Budget planning uses past data and makes changes to it. In this technique, the administration supposes that the measures of earnings and costs collected during the present year will also be returned in the coming year. Mainly, it will be assumed that earnings and income collected during the current year will be the starting point for approximations for the next year.
The results of the current budget plan are summed up and are added to next year’s budget plan. And subtle changes are made like in selling price, related income, and other increases in the actual prices. This technique consumes less time as compared to the Zero-Based Budgeting technique. But this method lacks in many things like innovations and no extra perk for the accountant.
Incremental Budgeting easily gets affected by subtle changes in the market as it is not very adaptive. The main focus of this method is only on the cost, no matter how complicated is the budget and expenses. The major drawback of this method is that it may result in increased expenses or spending.
What is Zero-Based Budgeting?
Zero-Based Budgeting is a methodology in which you need to specify all incomes made and expenses made every new year during budgeting. This method does not provide future predictions benefit as the budget expenses may increase or decrease. For newly settled companies and organizations, this budget plan is suitable as it does everything from starting or zero bases which decreases the failure of the budget plan.
This budget plan is very adaptive and is market-friendly. And it is proven more accurate than Incremental Budgeting as everything in this budget plan is considered from the base or scratch, which makes it more effective and adaptive. But due to its detailed study and base method, it takes more time, and the expenses while making this budget plan are also high.
Zero-Based Budgeting plan managers need to specify and justify all the financial collections and expenditures for the next budget plan to ensure that the budget plan made is free from all previous mistakes and expenditure failures.
Main Differences Between Incremental Budgeting and Zero-Based Budgeting
- Incremental Budgeting is making a budget plan using the last period’s actuals and adding the amount in an increment manner for the further budget. On the other hand, Zero-Based Budgeting is a method where you need to mention all income and costs for every year of the accounting period.
- The Zero-Based Budgeting decision package is based on cost-benefit analysis. While Incremental Budgeting is based on extrapolation, that is, future projections are carried out from the previous figures.
- Incremental Budgeting uses more time but it is economical or cost-efficient. Whereas Zero-Based Budgeting is time-consuming as well as expensive because it covers every detail.
- Zero-Based Budgeting usually monitors the acquirement of the intent or objective. While Incremental Budgeting mainly keeps track of the expenditures or spending. And it is given more importance.
- Zero-Based Budgeting is very adaptive when it comes to integrating changes in the market. But Incremental Budgeting is less reactive when it comes to market changes or fluctuations.
Conclusion
A budget plan is a must if you want a trouble-free expenditure. If you want to live a sophisticated and calculated life, you need to make your budget plans. All the companies and organizations, whether big or small, have their budget plan. The big the company is, the more complex the budget plan it has. Budget calculations can be accounting-driven and decision-driven. This all depends on the method that you use for planning.
Both Incremental Budgeting and Zero-Based Budgeting are used for the same purpose only, but the only difference is that both of them have different approaches. In Zero-Based Budgeting, everything begins from the very start or scratch But in Incremental Budgeting previous budget plan is considered and modified. Incremental Budgeting tells us about the changes in the budget plan, while Zero-Based Budgeting is mainly used to keep a check on the cost benefits.
References
- https://www.jstor.org/stable/4531961
- https://onlinelibrary.wiley.com/doi/abs/10.1002/9781119200871.ch30