CIPS L4M2 Defining Business Need · Free Practice Question Easy
Question 6
A company manager has created this year's budget. He based it on last year's data with a predicted annual increase. What type of budget has been created?
- A zero-based budget
- B incremental budget
- C activity based budget
- D rolling budget
Reveal correct answer
Correct answer: B
Explanation
This is an incremental budget. Budgets are discussed in LO 1.4 but they've made the study guide a bit longwinded on this bit.
Incremental budget = taking a past budget and adding on a % (this extra covers growth and inflation), so if your business sold 100 teddy bears last year then you could add 10% on and say next year we'll sell 110 teddy bears. Or if you say the business spend £3000 a month on cleaning, next year this will increase by 10% because wages are going up - next year's cleaning budget will be £3300. This is often the easiest way to do a budget.
Zero-based budgeting is when you start from scratch and don't look at last year's figures. This is long-winded and time consuming but apparently can lead to innovations.
Rolling budget = also known as a continuous budget, it extends the existing budget by adding a new period (such as a month, quarter, or year) as the current period concludes. Instead of being fixed for a set term, a rolling budget is continuously updated.
Activity based budget is pretty much what it sounds like. It focuses on the costs of activities necessary for making the product. Instead of traditional budgeting methods that might simply adjust previous budgets to account for inflation or revenue changes, ABB looks at the underlying activities and their costs.
See p.55- 64
Discussion
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