What is a disadvantage of incremental budgeting?

Incremental budgeting relies on the previous budget as the base for the new budget, making adjustments based on historical data and projected changes. This approach can lead to unrealistic spending assumptions because it often assumes that past expenditures are a good indication of future needs without critically evaluating whether those expenditures are still necessary or efficient.

For example, if an organization had a certain expense level in the previous year, incremental budgeting might simply increase that amount slightly for the next period without considering changes in circumstances, strategic priorities, or shifts in operational efficiency. This could result in funds being allocated to areas that no longer require the same level of investment or that are not aligned with current goals, ultimately leading to inefficiencies and resource wastage.

In contrast, the other options represent characteristics that are generally seen as advantages of incremental budgeting. For instance, it does encourage cost reduction by making departments justify their incremental increases. It also facilitates clear communication due to its straightforward nature, allowing stakeholders to understand budget changes easily. Additionally, it promotes accountability as departments are held responsible for their previous spending patterns. However, the risk of unrealistic assumptions stands out as a significant drawback in this budgeting method.