Incremental Budgeting Characteristics

Steps:

• Identify the budgeting method: Adding a percentage to last year's budget describes incremental budgeting.
• Evaluate statement 1: Performance-based pay is possible but not directly tied to incremental budgeting; it doesn't prohibit incentives.
• Evaluate statement 2: Incremental budgeting often perpetuates inefficiencies by basing new budgets on prior ones without full review.
• Evaluate statement 3: This method carries forward previous costs with minor adjustments, making it true.

Why D is correct:

• Incremental budgeting explicitly carries forward prior costs into the new budget with percentage increases, per standard accounting definitions.

Why the others are wrong:

• A: Includes false statement 1, as performance pay isn't restricted.
• B: Includes false statements 1 and 2.
• C: Includes false statement 2, as inefficiencies persist.

Final answer: D