Incremental budgeting
Incremental budgeting is the budgeting process in which a new budget is developed by making marginal changes to the current budget. These changes could include adjusting partly for inflation and partly for changes in the level of activity. Advantages of this method include simplicity, consistency, and operational stability while disadvantages include discouragement of financing of completely new ideas to reduce cost. There is no encouragement in finding alternatives to reduce costs while budgeting.
Zero-based budgeting
This method of budgeting does not rely on budget history. All expenses are to be justified to be included in the budget. Alternatives available for various activities are listed, costed and the best is chosen. So funds are allocated based on efficiency and necessity than based on the budget history.
Disadvantages of this efficient budgeting method are that it could be time-consuming and the requirement of expertise in the form of qualified or trained personnel.
As zero-based budgeting could lead to chaos if all expenses have to be justified in order to be part of the budget, one important area can be identified each year to apply zero-based budgeting while the incremental method can be applied to other areas.