Question

State two limitations of a budget.

Discuss the limitations of a budget.

State the limitations of budget?

Answer 1

1. Inflexibility: Very often budgets are so detailed that they become cumbersome. Over-budgeting may create rigidity by depriving the managers of the freedom and flexibility in managing their departments.
2. Expenditure: Budgetary control requires expenditure of time, money and efforts. It is difficult to prepare various kinds of budgets.
3. Inaccuracy: Budgets are based on forecasts or projections and historical trends. Forecasts may not be cent per cent true and trends may not repeat. Budget estimates are generally based on the price level at a particular point of time. These estimates may become meaningless when there is either inflation or depression in the market.
4. Distortion of Goals: Sometimes, budgets are treated as an end in themselves. People may be extra cautious to function within the boundaries of budget figures. In order to keep within budget limits, they may overlook the goals of the organisation. In such cases, budgetary goals supersede enterprise goals and budgets obstruct the attainment of objectives.
5. Hiding Inefficiencies: Budgets may be used to hide wastage and inefficiency. A department may be inefficient even though its expenses are within the budget limits. Expenditure incurred in the past may become evidence for it in future even though it may be unproductive. Managers of different departments may submit inflated figures of resources required by them.
6. No Substitute for Management: Budgetary control by itself cannot prevent deviations from occurring. It only points out deviations from the standards and a deliberate effort has to be made to prevent deviations. Therefore, budgetary control is not a substitute for executive judgment.
7. Psychological Problems: Budgets are used to evaluate performance. Individuals and groups who do not want to work hard consider budgets as pressure devices. Inefficient employees resist budgeting and put pressure to lower budgetary targets. Success of budgeting depends on mutual understanding and co-operation between all the persons working in the enterprise.