A video encoding apparatus and method are provided. The video encoding apparatus includes a video encoding circuit and a control circuit. The video encoding circuit performs a video encoding operation on a video stream to produce an encoded stream. The control circuit controls the video coding circuit to perform the video encoding operation. The control circuit dynamically sets a current frame in the video stream to at least one of a long-term reference frame, a short-term reference frame, and a non-reference frame according to at least one of a playback latency control condition and an inter-frame correlation condition. The long-term reference frame and the short-term reference frame are used as the decoding reference frame in a video decoding operation.