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    Accounting Standards Library
    Friday
    Dec102010

    What are the disadvantages of budgeting?

    The disadvantages of budgeting include:

    • Time required. It can be very time-consuming to create a budget, especially in a poorly-organized environment where many iterations of the budget may be required. The time involved is lower if there is a well-designed budgeting procedure in place, employees are accustomed to the process, and the company uses budgeting software. The time requirement can be unusually large if there is a participative budgeting process in place, since such a system involves an unusually large number of employees.
    • Gaming the system. An experienced manager may attempt to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing expense estimates, so that he can easily achieve favorable variances against the budget. This can be a serious problem, and requires considerable oversight to spot and eliminate.

    • Blame for outcomes. If a department does not achieve its budgeted results, the department manager may blame any other departments that provide services to it for not having adequately supported his department.
    • Expense allocations. The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation methods used.
    • Spend it or lose it. If a department is allowed a certain amount of expenditures and it does not appear that the department will spend all of the funds during the budget period, the department manager may authorize excessive expenditures at the last minute, on the grounds that his budget will be reduced in the next period unless he spends all of the amounts authorized in the current budget.
    • Only considers financial outcomes. Budgets are primarily concerned with the allocation of cash to specific activities, and the expected outcome of business transactions - they do not deal with more subjective issues, such as the quality of products or services provided to customers. These other issues can be stated as part of the budget, but this is not typically done.
    • Strategic rigidity. When a company creates an annual budget, the senior management team may decide that the focus of the organization for the next year will be entirely on meeting the targets outlined in the budget. This can be a problem if the market shifts in a different direction sometime during the budget year. In this case, the company should shift along with the market, rather than adhering to the budget.

    Related Topics

    What are the advantages of budgeting?
    What are the objectives of budgeting?
    What are the steps in preparing a budget?

     

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