Budgeting Methods: Advantages and Disadvantages

Posted on Mar 18, 2025 in Modern Languages and Management

Bottom-Up Budgeting

AdvantagesDisadvantages
  1. Increased motivation due to ownership of the budget.
  2. Should contain better information since employees are involved.
  3. Increases manager’s understanding and commitment.
  4. Better communication between departments.
  5. Senior managers can concentrate on strategy.
  1. Senior managers may resent loss of control.
  2. Dysfunctional behavior: budgets may not be in line with corporate objectives as managers lack a strategic perspective and will focus on divisional concerns.
  3. Bad decisions from inexperienced managers.
  4. Budget preparation is slow, and disputes can arise.
  5. Budgetary slack: managers set targets that are too easy to achieve.

Incremental Budgeting

AdvantagesDisadvantages
  1. Quickest and easiest method.
  2. Suitable if the organization is stable and historic figures are acceptable since only the increment needs to be justified.
  1. Builds in previous problems and inefficiencies.
  2. Uneconomic activities may be continued. E.g., the firm may continue to make a component in-house when it might be cheaper to outsource.
  3. 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.

Zero-Based Budgeting (ZBB)

AdvantagesDisadvantages
  1. Inefficient or obsolete operations can be identified and discontinued.
  2. ZBB leads to increased staff involvement at all levels since a lot more information and work is required to complete the budget.
  3. It responds to changes in the business environment.
  4. Knowledge and understanding of the cost behavior patterns of the organization will be enhanced.
  5. Resources should be allocated efficiently and economically.
  1. It emphasizes short-term benefits to the detriment of long-term goals.
  2. The budgeting process may become too rigid, and the organization may not be able to react to unforeseen opportunities or threats.
  3. The management skills required may not be present.
  4. Managers may feel demotivated due to the large amount of time spent on the budgeting process.
  5. Ranking can be difficult for different types of activities or where the benefits are qualitative in nature.

Rolling Budgets

AdvantagesDisadvantages
  1. Planning and control will be based on a more accurate budget.
  2. Rolling budgets reduce the element of uncertainty in budgeting since they concentrate on the short term when the degree of uncertainty is much smaller.
  3. There is always a budget that extends into the future (normally 12 months).
  4. It forces management to reassess the budget regularly and to produce budgets which are more up to date.
  1. Rolling budgets are more costly and time-consuming than incremental budgets.
  2. 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.
  3. There is a danger that the budget may become the last budget ‘plus or minus a bit’.
  4. An increase in budgeting work may lead to less control of the actual results.
  5. Issues with version control, as each month the full-year numbers will change.
  6. 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.