Question

list and discuss the pros and cons of using historical-based budgeting? Why type of companies or industries would benefit the most from this strategy?   

Answer 1

Historical Budgeting :- Traditional (historical) budgeting, whether bottom-up or top-down, typically involves taking last year's revenue and expenses and adding a growth factor to each side of the ledger (usually a higher growth factor on the revenue side than the expense side).

Pros of Historical Budgeting-

historical budgeting is quick and simple.

cons of Historical Budgeting-

it assumes that business conditions stay unchanged each year.

it can lead to wastage if departments in a business are given the same budget year on year. they may use up an expenditure budget to convince senior managers that they need the same amount annually.

Historical budgeting is used by many service companies and for some

administrative functions of manufacturing companies, such as purchasing,

engineering, and accounting.

But their are some essential conditions for using thistorical Budgeting

1. When the nature of business is not seasonal.

2. There is no impact of external factors on the business activities.

3. The demand of the product is certain and stable.

4. Supply orders are issued regularly.

5. The market of the product should be domestic rather than foreign.

6. There is no need of special labour or material in the production of the

Conclusion:-

Generally, all above conditions are not found in practice. Hence Fixed budget is

not important in business concerns.