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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Orion Pharma's R&D division is judged on a strict annual budget. In the final quarter, the head of R&D approves low-value, rushed purchases to use up the remaining allocation, then argues for a larger budget next year citing full utilisation. Using the budgeting literature, what does this behaviour most clearly illustrate and imply?

This is dysfunctional 'use it or lose it' behaviour, typical of rigid incremental budgets where unspent funds are cut next year. It wastes resources and undermines goal congruence, implying the organisation should review budget design, for example by justifying needs afresh or allowing flexibility, instead of rewarding full spending.

  1. ADysfunctional 'use it or lose it' behaviour, implying budgets should be decoupled from rigid incremental allocation and reviewed for relevanceCorrect
  2. BZero-based budgeting working as intended by justifying all spend
  3. CEffective activity-based budgeting driving cost reduction
  4. DA sign of strong goal congruence between division and group

Explanation

Spending the remaining allocation to protect next year's budget is classic dysfunctional behaviour linked to incremental budgeting and rigid annual limits. It harms value for money and goal congruence. Zero-based or activity-based budgeting would require justification of need rather than reward full utilisation, so those options are wrong.

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