Limitation of Budgeting - Budgetary Control, Cost Management Video Lecture | Cost Management - B Com

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today we are going to explain
limitations of budgeting
the limitations of budgeting are
inaccuracy time-consuming and costly
rigidity
excessive spending scope for
manipulation allocation of expenses
financial outcome oriented conflicts in
the organization
accuracy budgeting is based on a lot of
assumptions in estimating the expenses
and revenues these are generally based
on trends and the market scenario
prevailing at the time of making the
budget budgets can also be based on the
predictions made for the coming year
considering the data available at the
time of budgeting time-consuming and
costly budgeting exercise can be at
times a very time-consuming exercise it
involves extra manpower to get the
estimates as accurate as possible
especially for a big company with
various departments budgeting exercise
takes a huge effort the time consumed
may be low in cases where the company
uses budgeting software and the
employees are well-trained if the
company uses zero based budgeting
technique the time cost and effort
involved can be considerably large
virginity budgeted numbers are
considered sacrosanct by all the
departments and there is usually very
less flexibility after budgeting
exercise finishes the entire focus of
senior management is on the budget and
all the strategies revolve around the
budgeted numbers any change in the
market situations does not generally
evoke attention of the management to
make any drastic change in the strategy
due to budget constraint excessive
spending some managers believe that all
the funds that are allocated to their
department need to be spent it is
believed that if they do not use as much
as they are authorized to in the current
budget the funds budgeted for them in
the next budget would be reduced this
leads to unnecessary wastage of funds
and proves harmful to the company as a
whole affecting its profits
for manipulation at times an experienced
manager may deliberately inflate his
expenses and try to reduce the revenue
targets to be set in the budget this way
he can easily get an opportunity to get
the favorable variances against the
budgeted numbers that is by incurring
lower costs than budgeted cost and
achieving higher revenue than the
budgeted revenue this misleads the
stakeholders and des motivates the
employees allocation of expenses the
allocation of expenditure between the
departments is generally the call taken
by senior management managers of some
departments may raise issues in the
method used for allocation of these
expenses and this may create
controversies it is not possible to take
into considering suggestions from all
the departments regarding budgeting
methods and allocation of expenses
financial outcome oriented budgeting
exercises argued to be numbers driven it
focuses on the quantitative aspect of
the business or improving the
profitability of the company and does
not consider the subjective or
qualitative aspect the fact that the
stakeholders including the customers of
the company care about the quality of
services along with the cost of it is
totally sidetracked these are taken for
granted as a part of the budget but not
really seen in the budget so budgeting
exercise does not always look into the
needs of the customers conflicts in the
organization at times when a particular
department is unable to meet the
budgeted targets the end up blaming the
other department that provides services
to it for not providing the necessary
support they even conflict on the
transfer price that is decided
internally between the departments this
creates unnecessary tensions and the
company as a whole may not be able to
run efficiently
conclusion although budgeting comes with
a lot of limitations it may be
absolutely wrong to conclude that
budgeting exercise is futile for an
organization it does keep a department
tied up and restricts their freedom but
to some extent it does bring about some
discipline within the departments in
terms of the expenses that they incurred
during an accounting period
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