What are the merit and demerit of budgeting?

Answer 1

4 Main Merits of Performance Budgeting are as follows:

1. It helps the management to regulate its each and every activity according to predetermined standards of performance, targets and objectives.

2. It is not only an estimate of future needs but goes beyond that and- includes functions, programmes, activity schemes and time schedules to help effective and economic allocation for the programmes.

3. It lays great stress on the management of organisational structural and overall policy, personnel, financial, etc. from traditional to dynamic one.

4. It is not merely a projection of trends and targets but planning the business from grass root level to top level on rational thinking and forecasting.

These benefits do not come problem-free:

• Staff time devoted to budgets carries a real opportunity cost. At Davis, 750 people are involved with budgeting. The time these workers give to the budgeting process means they are not available to carry out other responsibilities.
• Errors and inaccuracies will always remain since it is impossible to predict the future. Major external events such as rising energy prices or the global recession may distort the whole process.
• Budgets involve and affect people, they may cause conflict. There may be difficult choices over where limited funds are spent. Some departments with tight budgets could feel constrained. This carries the risk of frustrating initiative and enterprise.