ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting
Harbour Logistics Ltd has always set next year's budget by taking this year's actual costs and adding 4% for inflation. Managers say this lets them keep spending levels they no longer need, and little scrutiny is applied to existing activities. Which budgeting approach is the company using, and what is its main weakness shown here?
The company uses incremental budgeting, because it builds the new budget from last year's actuals plus an inflation uplift. The main weakness is that past inefficiencies and slack are carried forward unchallenged, since existing activities and spending levels are never justified afresh.
- AIncremental budgeting, which perpetuates past inefficiencies and slackCorrect
- BZero-based budgeting, which is time-consuming because every activity must be justified
- CRolling budgeting, which becomes out of date as the year progresses
- DActivity-based budgeting, which ignores the causes of cost
Explanation
Starting from last year's actuals and adding a percentage is incremental budgeting. Its weakness is that inefficiencies and budgetary slack carry forward because existing activities are not challenged. Zero-based budgeting would instead require justification from scratch.
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