ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting
Corvane Logistics sets its annual budget by taking last year's actual costs for each department and adding 3% for inflation. Department heads rarely challenge the figures, and managers who underspend find the following year's allocation is unchanged in real terms. Which budgeting approach is Corvane using, and what is its main weakness?
Corvane uses incremental budgeting because it builds on prior-year actuals plus an inflation uplift. The main weakness is that past inefficiencies and budgetary slack are carried forward, and managers are encouraged to spend their full allocation to protect next year's budget.
- AIncremental budgeting, which tends to carry forward past inefficiencies and encourages spending up to the limitCorrect
- BZero-based budgeting, which is time-consuming because every activity must be rejustified from scratch
- CRolling budgeting, which is costly because it is updated every period
- DActivity-based budgeting, which is distorted by the use of volume-related cost drivers only
Explanation
Starting from last year's actuals and adding an inflation uplift is incremental budgeting. Its weakness is that existing inefficiencies and slack are built into the base. Zero-based budgeting would instead require every activity to be justified from nil, which Corvane does not do.
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