Question

Cost Accounting I

What is a self-imposed budget? What are some of the advantages and disadvantages of a company using a self-imposed budget?

Answer 1

Imposed Budget is a budget that is prepared by a method in which managers at different departmental heads prepare their own budgets. These budgets are then reviewed by the manager’s supervisor, and any issues are resolved by mutual agreement.

Advantages
1. Budget Estimates are made by departmental managers instead of the top level management. The departmental managers are more aware about the requirements of their department as opposed to the top level, who might not be as aware.
2. It will lead to a higher motivated staff as individual participation increases.
3. Further, the manager would be even more responsible for achieving the budget as it is prepared by him; hence leading to better performance at company level along with individual level.
4. Individuals at all levels are recognised as members of the team, and their opinions and ideas are also taken; hence leading to variety of options.

Disadvantages
1. This type of budgeting may be time consuming and hence, not prove very cost effective.
2. This puts unnecessary burden on the managers of preparing the budget, instead of just adhering to the budgets.
3. This may foster Budgetary "gaming' through budgetary slack.
4. It may lack strategic direction.