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Traditional budgeting systems are incremental in nature and tend to focus on cost centers. Activity based budgeting (ABB) links strategic planning to the overall performance...

      

Traditional budgeting systems are incremental in nature and tend to focus on cost centers. Activity based budgeting (ABB) links strategic planning to the overall performance measurement aimed at continuous improvement.
Required:
i Explain the weakness of traditional incremental budgeting systems.
ii Describe the main feature of activity based budgeting system and comment on its advantages.

  

Answers


Kavungya
(i) Incremental budgeting uses the previous year?s budget as the starting point for
the preparation of next year?s budget. It assume that the basic structure of the budget
will remain unchanged and that adjustments will be made to allow for changes in volume,
efficiency and price levels. The budget is therefore concerned with increments to operations
that will occur during the period and the focus is on existing uses of resources rather than
considering alternative strategies for the future budget period. Incremental budgeting suffers
from the following weaknesses:
i It perpetuates past inefficiencies
ii There is insufficient focus on improving efficiency and effectiveness.
iii The resource allocation tends to be based on existing strategies rather than considering
future strategies.
iv It tends to focus excessively on the short term and often leads to arbitrary cuts being
made in order to achieve short-term financial targets

(ii) The answer should stress that:;
i. The focus is on managing activities
ii. The focus is on the resources that are required for undertaking activities and identifying
those activities resources that are un-utilized or which are insufficient to meet the
requirements specified in the budget.
iii. Attention is given to eliminating non-value-added activities.
iv. The focus is on the control of the causes of costs (i.e. the cost drivers).
Kavungya answered the question on May 6, 2021 at 08:50


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