American Institute of Certified Planners (AICP) Practice Exam

Which characteristic is considered a disadvantage of line item budgeting?

1. High flexibility

2. Strong alignment with organizational objectives

3. Lack of flexibility

4. Ease of preparation

The correct answer is: Lack of flexibility

Line item budgeting is characterized by its focus on categorizing expenses into specific items, which typically results in a rigid structure. This characteristic can be a disadvantage because it limits the ability of managers to adapt to changing circumstances or redistribute funds as needed. In environments where priorities shift rapidly or unexpected expenses arise, the inflexibility of line item budgeting can hinder responsiveness. Unlike systems that allow for more flexibility, such as performance-based or zero-based budgeting, line item budgets tend to stick to predetermined categories, making it difficult for organizations to pivot resources to where they are most needed. This rigidity can constrain an organization's ability to innovate or respond to new challenges effectively, as there is a lack of room for maneuvering within the set budgetary categories. The other options highlight attributes that are typically seen as strengths in budgeting processes, such as high flexibility and strong alignment with organizational objectives. In contrast, the lack of flexibility associated with line item budgeting directly contributes to its classification as a disadvantage. Ultimately, the inability to adapt and modify budget allocations can create barriers to effective financial management within an organization.