Difference between zero-based and incremental budgeting

The difference lies in the basis of budgeting.

The incremental budgeting method, also known as the "fixed-base budgeting method," is a method of preparing a budget based on the level of costs and expenses in the base period, and adjusting the original cost items and budget amounts by taking into account the level of business volume in the budget period as well as measures to reduce costs.

Zero-based budgeting, which is called "zero-based planning and budgeting," is mainly used to prepare budgets for selling expenses and administrative expenses. Unlike the traditional incremental budget method, it completely abandons the existing fait accompli, and starts from scratch with a detailed review, analysis, and evaluation of all operations, so as to prepare the corporate budget accordingly.

Traditional Budgeting

1. Extrapolating past spending trends (or previous year's spending) to the next year.

2. Increasing the amount, as appropriate, to accommodate higher labor and raw material costs due to higher wages and rising prices.

3. Increase the amount to meet the additional budgeted expenditures required to revise the original program and modify the original design, usually by 30% or more of the original budget.