Question

What are the disadvantages of budgeting

Answer 1

Advantages of Budgeting:

1. It helps in planning the course of action to achieve financial targets.
?2. Activity based budgeting helps in identifying operation or business units which are more profitable than others. This helps in removing unproductive activities or selling off unprofitable business units or projects.
3. It involves estimation of revenue and costs, depreciation, taxes etc. This helps in identifying the assets, debt, equity required for financing, etc.
4. It helps in coming up ideas regarding savings in costs and also increasing revenues.
5. It encourages participation and involvement of the different departments of the company.
6. It helps in analysing whether to take up a new project or not.

Disadvantages of Budgeting:

1. Lot of assumptions needed to be taken which might create error in getting an accurate budget.
2. It is an expense and manpower needed to be used for this exercise. Moreover time is also needed to be expensed in this case.
3. The calculation of revenue and expense might create conflict among the employees of the company because different departments might give different estimates.
4. It is silent on quality, performance of products, etc. It is more focussed toward financial outcome.
5. There is scope of overestimating expense and underestimating revenues by experienced financial planners whereas as a novice might calculate it vice versa. In both the cases proper decision won't be taken

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