Professional in Human Resources (PHR) Practice Exam

What characterizes incremental budgeting?

1. Setting budgets based on previous year’s expenses

2. Allocating funds equally across departments

3. Using a zero-based approach to funding

4. Adjusting budgets based on future projections

The correct answer is: Setting budgets based on previous year’s expenses

Incremental budgeting is characterized primarily by setting budgets based on previous year’s expenses. This method involves taking last year's budget as a base and making adjustments—whether increasing, decreasing, or maintaining—according to various factors such as inflation, expected growth, or changes in priorities. It is a straightforward approach that is often favored for its simplicity and ease of implementation, allowing organizations to quickly develop budgets without starting from scratch. The rationale behind this methodology is that it builds upon the historical spending patterns of an organization, reflecting both normal operating costs and any required adjustments based on anticipated changes. This approach can be particularly useful in stable environments where expenses do not vary dramatically from year to year. In contrast, the other options describe methods that do not align with the incremental budgeting framework. For instance, allocating funds equally across departments would not consider the specific needs or historical expenditures of each area, and using a zero-based approach requires justifying all expenses anew rather than relying on past budgets. Adjusting budgets based on future projections may lead organizations towards more dynamic budgeting strategies rather than the consistent approach that incremental budgeting embodies.