33. A company's marketing department had a budget of $200,000 last year. This year, it plans to increase the budget by 5% to account for inflation. Which budgeting approach is the company using?
Answer: B
Incremental budgeting is the approach being used by the company.
The company is increasing its budget by a fixed percentage of the previous year's allocation, which is characteristic of incremental budgeting. This method adjusts the prior budget based on expected changes, in this case, an increase of 5% to account for inflation.
A) Activity-based budgeting
Activity-based budgeting focuses on the costs of activities necessary to produce and sell products or services, rather than simply adjusting previous budgets. Since the scenario describes a straightforward percentage increase from the previous budget rather than an analysis of activities, this option is incorrect.
B) Incremental budgeting
Incremental budgeting is the correct choice as it involves making adjustments to the existing budget based on a predetermined percentage increase. In this case, the company is increasing its $200,000 budget by 5%, which aligns perfectly with the incremental budgeting approach.
C) Flexible budgeting
Flexible budgeting adjusts costs based on changing levels of activity or volume, allowing for real-time adjustments to budget allocations. Since the company is not adjusting its budget based on variable activity levels but instead applying a fixed percentage increase, this option does not apply.
D) Zero-based budgeting
Zero-based budgeting requires justifying all budgeted expenses from a "zero base," meaning every function within an organization is analyzed for its needs and costs. Since the company is simply increasing the previous budget rather than starting from scratch and justifying each line item, this option is not correct.
Conclusion
Incremental budgeting is the most suitable approach in this context as it reflects the company's decision to increase its existing budget by a specific percentage. Other options, such as activity-based, flexible, and zero-based budgeting, do not align with the straightforward method of adjusting the previous budget that the company is employing. Therefore, incremental budgeting is definitively the correct answer.