27. A major, well-established company with steady operations and fairly predictable expenses intends to change its budgeting methods starting this year. Which budgeting approach is suitable for the company?
Answer: C
Incremental budgeting is suitable for the company.
Incremental budgeting is appropriate for a major, well-established company with steady operations and predictable expenses because it allows for adjustments based on previous budgets while taking into account any necessary changes. This method simplifies the budgeting process by using the prior year's budget as a base and making incremental changes, which aligns well with the company’s stable financial environment.
A) Cost budgeting
Cost budgeting focuses on estimating costs for specific projects or departments rather than providing a comprehensive view of the overall budget. This approach may not suit a well-established company with steady operations, as it does not emphasize the broader operational context or allow for the predictability needed for strategic planning.
B) Operating cash budgeting
Operating cash budgeting emphasizes managing cash flows and ensuring that the company can meet its financial obligations. While important, this approach may not address the overall budgeting needs of a stable company that seeks to implement a method that accommodates predictable expenses rather than just focusing on cash management.
C) Incremental budgeting
Incremental budgeting is particularly suitable for this company as it builds upon the existing budget, making it easier to allocate resources based on historical data. This method allows the company to maintain its steady operational flow while adapting to minor changes without the need for a complete overhaul of the budgeting process.
D) Zero-based budgeting
Zero-based budgeting requires justifying all expenses from scratch for each new period, which can be time-consuming and may not be necessary for a company with established operations and predictable expenses. This approach is often more beneficial for organizations undergoing significant changes or looking to reduce costs rather than those with steady financial patterns.
Conclusion
Incremental budgeting is the most fitting approach for a stable, well-established company as it allows for straightforward adjustments based on previous budgets while ensuring operational consistency. Other options, while valuable in different contexts, do not align as closely with the company’s need for predictability and ease of implementation.