CAF-7 · Chapter 11 · Question 11 of 15
A firm adopts a budgeting approach where next year's budget is prepared simply by taking this year's actual results and adding a 5% allowance for inflation. What is the major flaw of this approach?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It carries forward past inefficiencies and wasteful spending into the new budget
Explanation
This describes incremental budgeting. Its biggest flaw is that it assumes historical spending was necessary and efficient. Therefore, any past waste or inefficiencies are automatically funded again and carried forward into future periods.
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