What is the biggest disadvantage of line-item budgeting?

Line-item budgeting is a traditional approach to budgeting that focuses on individual items of expenditure within a budget. One of the major disadvantages of this method is its inability to effectively measure how efficiently work is performed. This is primarily because this budgeting style categorizes expenditures based on specific items rather than focusing on the outcomes or outputs of various programs or activities.

As a result, while line-item budgets can provide detailed information on spending, they do not highlight the relationship between spending and performance. Decision-makers may not be able to see whether resources are being utilized effectively to achieve organizational goals. This lack of performance measurement can lead to inefficiencies and a misallocation of resources, as funds may be spent without a clear understanding of their impact on overall objectives.

This focus on inputs (the budgeted amounts for each line item) rather than on results can undermine the organization’s ability to evaluate performance appropriately and to make informed decisions about adjustments needed to improve operational efficiency and effectiveness. Therefore, the correct answer addresses a fundamental issue in the line-item budgeting approach, highlighting its limitations in performance management.