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ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting

Kestrel Ltd uses incremental budgeting. Last year's actual marketing expenditure was $240,000, which was $10,000 above the original budget. Management decides the new budget will be based on last year's actual expenditure, increased by 5% for inflation. What is the new marketing budget?

The new marketing budget is $252,000. Under incremental budgeting with last year's actual spending of $240,000 as the base, a 5% inflation uplift gives $240,000 multiplied by 1.05. Using the original budget of $230,000 as the base would be the wrong starting point.

  1. A$241,500
  2. B$252,000Correct
  3. C$262,500
  4. D$264,600

Explanation

The base is last year's actual of $240,000, as stated. Adding 5% gives $240,000 x 1.05 = $252,000. Using the original budget of $230,000 as the base would give $241,500, which is wrong because the base specified is actual spending.

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