ACCA Performance Management (F5) Certification Practice Exam

What disadvantage is associated with a traditional incremental budget?

1. It can lead to demotivation among employees

2. It may perpetuate previous inefficiencies

3. It cannot be used in stable organizations

4. It requires constant updates during the year

The correct answer is: It may perpetuate previous inefficiencies

A traditional incremental budget allocates funds based on the prior year’s budget with minimal adjustments. One major disadvantage of this approach is that it may perpetuate previous inefficiencies. Since these budgets primarily rely on historical data and incremental changes, they often do not encourage organizations to reassess processes, eliminate waste, or streamline operations. Consequently, inefficiencies that existed in past budgets can continue into the new budget cycle without proper evaluation or discussion of whether the past expenditure levels were justified or effective. This type of budgeting essentially reinforces the status quo without prompting necessary innovation or cost-cutting initiatives, which may hinder an organization's overall performance and responsiveness to changing business conditions. Organizations using traditional incremental budgets might miss opportunities for improvement as they accept previous spending as the baseline, potentially leading to stagnation and reduced competitiveness. In contrast to this, other options do not align as closely with the core issues associated with incremental budgeting. While employee demotivation can occur in various budgeting approaches, it’s not a direct consequence unique to incremental budgeting. The traditional method can indeed be used in stable organizations, and while it could require updates depending on circumstances, it is not a fundamental characteristic of incremental budgeting as a strategy.