Lesson 67 - Intermediate Accounting Course 

67. Budgeting Techniques: Zero-Based vs. Incremental Budgeting

Budgeting is a critical financial planning tool that helps businesses allocate resources efficiently. Two common budgeting methods are Zero-Based Budgeting (ZBB) and Incremental Budgeting. Each has its own advantages and is suitable for different types of organizations.

1️⃣ What is Budgeting?

Budgeting is the process of estimating income and expenses for a specific period to ensure financial stability and operational efficiency.

📌 Why is Budgeting Important?

✅ Helps control costs and avoid unnecessary spending.
✅ Ensures resources are allocated efficiently.
✅ Improves financial forecasting and decision-making.

There are different budgeting approaches, but two of the most commonly used are:

• Zero-Based Budgeting (ZBB)
  
  

• Incremental Budgeting

2️⃣ Zero-Based Budgeting (ZBB)

🔹 Definition:
Zero-Based Budgeting starts from zero each period. Every expense must be justified and approved before being added to the budget.

🔹 How it Works:
1️⃣ Every department starts with a blank budget (no automatic carryovers).
2️⃣ Expenses are reviewed and justified from scratch.
3️⃣ Only necessary expenses are approved based on priority.

🔹 Pros:
✔️ Helps eliminate unnecessary costs.
✔️ Encourages detailed cost analysis and efficiency.
✔️ Promotes strategic decision-making.

🔹 Cons:
❌ Time-consuming and complex to prepare.
❌ Requires extensive data collection and analysis.
❌ Can lead to short-term focus, ignoring long-term investments.

📌 Example: A startup using ZBB justifies each expense, ensuring that only essential costs (like product development and marketing) are included.

3️⃣ Incremental Budgeting

🔹 Definition:
Incremental Budgeting is a traditional approach where the previous period’s budget is used as a baseline, with minor adjustments (increments) based on expected changes.

🔹 How it Works:
1️⃣ Last year’s budget is reviewed.
2️⃣ Adjustments (+/-) are made based on inflation, growth, or priorities.
3️⃣ Budget is approved with minor modifications.

🔹 Pros:
✔️ Simple and easy to implement.
✔️ Less time-consuming than ZBB.
✔️ Provides stability and predictability.

🔹 Cons:
❌ Can lead to wasteful spending (since past budgets are not questioned).
❌ Doesn't encourage efficiency or cost-cutting.
❌ May not adapt well to changing business needs.

📌 Example: A government agency using incremental budgeting adds a 3% increase to last year’s budget to account for inflation.

4️⃣ Key Differences Between ZBB and Incremental Budgeting 

5️⃣ When to Use Each Budgeting Method?

🔹 Use ZBB if:
✔️ You need to cut unnecessary costs and improve efficiency.
✔️ Your company operates in a rapidly changing environment.
✔️ You are a startup with limited resources.

🔹 Use Incremental Budgeting if:
✔️ Your business is stable and has predictable expenses.
✔️ You want a quick and easy budgeting process.
✔️ Your organization follows long-term plans (e.g., government budgets).

6️⃣ Final Thoughts

Both Zero-Based Budgeting (ZBB) and Incremental Budgeting have their benefits and drawbacks. ZBB is ideal for efficiency and cost-cutting, while Incremental Budgeting works well for stability and simplicity.