Budgeting Methods: Advantages and Disadvantages
Posted on Mar 18, 2025 in Modern Languages and Management
Bottom-Up Budgeting
Advantages | Disadvantages |
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- Increased motivation due to ownership of the budget.
- Should contain better information since employees are involved.
- Increases manager’s understanding and commitment.
- Better communication between departments.
- Senior managers can concentrate on strategy.
| - Senior managers may resent loss of control.
- Dysfunctional behavior: budgets may not be in line with corporate objectives as managers lack a strategic perspective and will focus on divisional concerns.
- Bad decisions from inexperienced managers.
- Budget preparation is slow, and disputes can arise.
- Budgetary slack: managers set targets that are too easy to achieve.
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Incremental Budgeting
Advantages | Disadvantages |
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- Quickest and easiest method.
- Suitable if the organization is stable and historic figures are acceptable since only the increment needs to be justified.
| - Builds in previous problems and inefficiencies.
- Uneconomic activities may be continued. E.g., the firm may continue to make a component in-house when it might be cheaper to outsource.
- Managers may spend unnecessarily to use up their budgeted expenditure allowance this year, thus ensuring they get the same (or a larger) budget next year.
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Zero-Based Budgeting (ZBB)
Advantages | Disadvantages |
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- Inefficient or obsolete operations can be identified and discontinued.
- ZBB leads to increased staff involvement at all levels since a lot more information and work is required to complete the budget.
- It responds to changes in the business environment.
- Knowledge and understanding of the cost behavior patterns of the organization will be enhanced.
- Resources should be allocated efficiently and economically.
| - It emphasizes short-term benefits to the detriment of long-term goals.
- The budgeting process may become too rigid, and the organization may not be able to react to unforeseen opportunities or threats.
- The management skills required may not be present.
- Managers may feel demotivated due to the large amount of time spent on the budgeting process.
- Ranking can be difficult for different types of activities or where the benefits are qualitative in nature.
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Rolling Budgets
Advantages | Disadvantages |
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- Planning and control will be based on a more accurate budget.
- Rolling budgets reduce the element of uncertainty in budgeting since they concentrate on the short term when the degree of uncertainty is much smaller.
- There is always a budget that extends into the future (normally 12 months).
- It forces management to reassess the budget regularly and to produce budgets which are more up to date.
| - Rolling budgets are more costly and time-consuming than incremental budgets.
- May demotivate employees if they feel that they spend a large proportion of their time budgeting or if they feel that the budgetary targets are constantly changing.
- There is a danger that the budget may become the last budget ‘plus or minus a bit’.
- An increase in budgeting work may lead to less control of the actual results.
- Issues with version control, as each month the full-year numbers will change.
- Confusion in meetings as to which numbers the business is working towards; this can distract from the key issues as managers discuss which numbers to achieve.
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