What type of operating budget starts with the previous year's budget and adjusts for inflation?

The appropriate type of operating budget that begins with the previous year's budget and makes adjustments for inflation is an incremental operating budget. This budgeting approach assumes that the prior year's expenses will continue into the next fiscal period, with minor adjustments as necessary. Typically, these adjustments account for factors such as inflation, increased costs, or changes in service levels.

Incremental budgeting is widely used because it is straightforward and less resource-intensive compared to more complex approaches, making it easier for organizations to create budgets based on historical spending patterns. This method helps to ensure that budgetary decisions are closely tied to previous financial performance while also accounting for changes in the economic environment.

Flexible, zero-based, and fixed operating budgets each follow different methodologies. A flexible operating budget adjusts based on actual activity levels, a zero-based operating budget requires all expenses to be justified from scratch every period, and a fixed operating budget remains constant regardless of changes in activity levels. These distinctions clarify why the incremental operating budget is the correct choice in this context.