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Hi sir just a little clarification regarding incremental budget
Every year your supposed to Increase it to a certain percentage or by the inflation rate… Do we ever decrease certain components if we wish to cut cost??? … Can we do that in an Incremental Budget?
Oh yes 🙂
With incremental you take last years figures and adjust for two things – one is inflation (or deflation, although that is obviously less likely), but the other is for changes in the level of activity. So, if you budget on producing more next year, then of course you will need to increase all the variable cost budgets. However, if you are budgeting on producing less next year, then (for this factor) you would decrease all the variable cost budgets.
In addition, there is no reason why you should not decrease the budget if you feel that you will be able to cut costs in some way (although for numbers in the exam, it is less likely that you would have this information).
perfect thank u so much 🙂
but since we can decrease our variable cost .. why does the budget Encourages Slack?…..is that due to poor planning?
Slack is not using all the resources available right?…Slack in this context is budgeting for more than we actually need to spend.
The problem is that with incremental budgeting it is common to just adjust for inflation and changes in volume, but not to consider the possibility of being more efficient and therefore to budget to spend less.
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