Per AccountingTools, it:

• is always wrong
  • when budget is created YE, it’s based on pretty good predictions
  • inevitably, predictions get increasingly “dicey”
  • and budget become increasingly irrelevant, up or down
  • as described on previous PP, OIS is as current as possible
• imposes rigid decision-making
  • with no mechanism for revisions to budget, decision making becomes increasingly rigid
  • also, managers still think they can spend the budget, rupturing profit budgeted
  • OIS is constantly being revised to keep it current. See previous PP
• can be very time/cost consuming to complete
  • depends on size of company; 2-3 months for larger companies for which OIS is the most appealing
  • longer if the budget is tied to performance metrics, approval processes, and extensive forecasting,
  • even longer if budget is aligned with fixed, annual plans rather than rolling forecasts
  • There is no annual budgeting process with OIS.
• allows for gaming the system

• • manager can deliberately increase expense estimates to make budget to achieve bonuses
  • which is unethical behavior
  • managers have no control over their budgets; OIS sets them and updates as necessary
• encourages use it or lose it behavior
  • If a department’s expenditures are headed to being under its budget, what are the manager’s options?
  • come in under budget and risk a cut next year = best for company
  • spend to be sure you don’t get a cut next year = best for manager
  • Next year’s budget is developed by OIS with no reference to this year’s budget which eliminates the risk described
• allows blame for outcomes
  • If a department didn’t make its budget, blame the departments upon which the manager depends for goods and services to do his job
  • very unlikely to happen. All departments have the resources necessary to support the forecasted volumes. So, not making a budget could compromise attaining those volumes and associated profit. Something a manager is very unlikely likely to allow to happen…