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ACCA Applied Knowledge · Management Accounting · Behavioural aspects of budgeting

A company finds that its managers spend all of their allocated budget each year, even when they could save money, because they fear next year's budget will be reduced. Which budgeting approach is most likely to reduce this behaviour?

Zero-based budgeting is most likely to reduce this behaviour because each budget must be justified from scratch, so last year's spending does not set the base. Under incremental budgeting managers spend everything to avoid cuts. Imposed tighter targets would likely worsen motivation.

  1. AIncremental budgeting based on last year's spend
  2. BImposed budgeting with tighter targets
  3. CZero-based budgeting, where each budget is justified from scratchCorrect
  4. DFixed budgeting with no variance reporting

Explanation

The behaviour of spending to protect next year's allocation arises from incremental budgeting, where the past spend is the base. Zero-based budgeting requires every item to be justified afresh, so unused funds do not set next year's base. Imposed tighter targets would increase pressure and demotivation, not remove the incentive to spend.

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