##### Class-notes prepared and uploaded by-Dr Adidur Rahman Dept. of Pol. Science, HAAC h For 4th sem. (Honours), paper-4026, Public Policy &Administration in India

## TOPIC: TOPIC: Different Approaches to Budgeting

Following are some if the widely used approaches of budgeting:

## (1) Incremental Approach of Budgeting

The incremental approach is the most common method of budgeting as widely used in government and not for profit organisation. It takes last year's actual figures and adds or subtracts a percentage to obta in the current year's budget. It means that in budget appropriation which needs merely to justify proposed expenditure in excess of the previous budget. Incremental budgeting is appropriate to use if the primary cost drivers do not change from year to year. Advantages: Following are some of the advantages of this approach:

- i. incremental approach is relatively easy to implement as financial records of prior periods, the i. incremental approach is relatively easy to implement as financial records of prior periods, the ground where this method is based upon, are usually available.
- ii. approach simplifies the budget process by considering only the increments in the previous ii. approach simplifies the budget process by considering only the increments in the previous budget items.
- iii. incremental budgeting facilitates a steady flow of fund into every facet of the organisat ion's iii. incremental budgeting facilitates a steady flow of fund into every facet of the organisat ion's activities and functions.

## Disadvantages:

Following are some of the problems of this approach:

- i. major disadvantage is that existing waste and inefficiencies could escalate year after year. i. major disadvantage is that existing waste and inefficiencies could escalate year after year.
- ii. pointed out that there is perpetuated resource allocation in incremental budgeting. In ii. pointed out that there is perpetuated resource allocation in incremental budgeting. In incremental budgeting, different departments tend to have the same percentage rise in share over the years; as such the approach fails to adjust the allocation of resources to accommodate their various needs.
- iii. method only studies the slight changes from the previous budget at the expense of any iii. method only studies the slight changes from the previous budget at the expense of any number of radical changes in the external drivers of activity and performance. Incremental budgeting ignores any external factors and simply assumes the cost will grow.
- iv. approach is criticised for being conservative and averse to innovation. As conservativeness is iv. approach is criticised for being conservative and averse to innovation. As conservativeness is a trait that lies at the root of incremental budgeting, as it does not foster or reward innovative ideas.
- v. problem is that there are incentives to manipulate the budget v. problem is that there are incentives to manipulate the budget by revenue growth or exaggerating expenditure so that the variance between the underestimating two is in their favour.

## (2) Activity-Based Approach:

Activity-based approach is a top-down budgeting approach. It calculates the total cost needed to hit the target of the anticipated level of activities. This top-down method first calls for the identification and thorough scrutiny of all the activities that drive cost. This analysis will then give grounds for allocating resources to achieve the level of activities that was anticipated beforehand. It determines the amount of inputs required to support the targets. It allocates resources by studying the efficiencies of the activity that is under review. Thus, activity-based budgeting predicts cost of budget objective by adding all cost of the activity cost drivers that each product or service is budgeted to consume. In evaluating the proposed budget, management would focus their attention on identifying the optimal set of activities rather than just the output or input relationship.

## Advantages:

- i. activity-based approach provides efficiency and a complete picture of the organisation by i. activity-based approach provides efficiency and a complete picture of the organisation by linking every function and department with their spending.