The biggest limitation of traditional budgeting system is that it focuses primarily on expenses, paying little attention to the results obtained as a result of the expenses incurred. Thus in the above example, the marketing manager may fail to cash on an opportunity to sell more by increasing the travelling of his sales-persons because that will lead to the travel expenditure exceeding the budget.
The emphasis on input cost to the inclusion of the consideration of results obtained makes budgeting quite meaningless when the level of operations are very much fluctuating. For example, production cost in any company are closely linked to the level of production. Therefore, a rigid budget, that fails to take into consideration the level of production can become quite inappropriate as planing or controlling tool.
Another common problem of budgeting system is related to the way budgets are finalised. In many organizations the budgets are often prepared on the basis of past performance rather than the future requirements. This tends to create a false feeling of planned working, when in reality the organization is only drifting along with the flow of past trends.
There have been many attempts to overcome the limitations of budgeting systems by introducing many innovations such as flexible budgeting, zero based budgeting, and performance budgeting.
Rickards (2006) believes the main purpose of budgets is to
help implement a firm’s strategy, not just controlling and planning. The changes in the economic environment and business processes led to evolutions in budgeting. From the initial cash budgets to more modern techniques of zero based budgeting (ZBB) and activity based budgeting (ABB).From the initial cash budgets to more modern techniques of zero based budgeting (ZBB) and activity based budgeting (ABB).
III. Criticisms of Traditional Budgeting
The traditional budgeting methods are considered too time consuming and unresponsive to...
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