Question

Each year Caliente, Inc., follows a budgeting process. The first step is always to look at the previous year's budget and see if anything needs to be updated. Caliente uses ____ budgeting.

Answer 1

Caliente, Inc. utilizes incremental budgeting, wherein each year's budget is adjusted based on the previous year's figures. This method assumes that past financial patterns will largely continue, with modifications for any expected changes in costs or revenues.

Step-by-step explanation:

Caliente, Inc. employs a budgeting process where the initial step involves reviewing the previous year's budget to determine if updates are necessary. This practice is known as incremental budgeting. Incremental budgeting is a method where the current year's budget is based on adjustments made to the prior year's figures rather than starting from scratch. This adjustment may include accounting for inflation, changes in costs, or changes in revenue projections.

Creating a budget and adhering to it is crucial for managing finances effectively. It allows organizations to ensure that they have sufficient funds to cover all their expected expenses. Incremental budgeting simplifies this process by using the historical data as a foundation, making the critical assumption that past patterns of spending and income will continue into the future with minor modifications.

The process of incremental budgeting typically involves analyzing various elements such as utility costs, salaries, supply costs, and revenue streams. Managers can then make informed decisions on whether to increase or decrease certain areas of the budget based on performance, market expectations, or strategic changes in the organization's direction.