Difference Between Incremental Budgeting and Zero-Based Budgeting

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.

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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.

Incremental Budgeting vs Zero-Based Budgeting

The 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 vs Zero Based Budgeting

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.

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.

Comparison Table

Parameters of ComparisonIncremental BudgetingZero-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 suggestionsIncremental 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 timeIncremental 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.
ApproachIncremental Budgeting mainly keeps track of the expenditures or spending. Zero-Based Budgeting usually monitors the acquirement of the intent or objective.
ImportanceIt is accounting-oriented and focuses only on the cost. Zero-Based Budgeting is decision-oriented.
ProcedureIncremental 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.

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.

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.

incremental budgeting

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 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.

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.

zero based budgeting

Main Differences Between Incremental Budgeting and Zero-Based Budgeting 

  1. Zero-Based Budgeting usually monitors the acquirement of the intent or objective. While Incremental Budgeting mainly keeps track of the expenditures or spending.
  2. 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.

References

  1. https://www.jstor.org/stable/4531961
  2. https://onlinelibrary.wiley.com/doi/abs/10.1002/9781119200871.ch30
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