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ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting

A company's budget for next year is prepared by taking the current year's actual figures and adding 4% for inflation, with no review of whether activities are still needed. Which weakness of budgeting does this approach most clearly show?

The approach perpetuates past inefficiencies and slack. Adding a percentage to last year's actuals without reviewing whether activities are needed means wasteful spending is carried forward into the new budget, which is the main weakness of incremental budgeting.

  1. AIt perpetuates past inefficiencies and slackCorrect
  2. BIt is too time-consuming because every activity is justified from zero
  3. CIt ignores the need for management approval
  4. DIt prevents communication between departments

Explanation

Incremental budgeting builds on past figures without questioning them, so inefficiencies and budgetary slack carry forward. Justifying every activity from zero describes zero-based budgeting, which is the opposite approach.

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