Chapter 6

Question 1

Incremental budgeting

Answer 1

Where is the budget for the forthcoming period is calculated by taking the current period and adding on a amount to account for anticipated, inflation and growth

Question 2

Advantages of incremental budgeting

Answer 2

The budget is stable and changes gradual.

The system is relatively simple to operate and easy to understand.

Coordination between budgets is easier to achieve.

Question 3

Disadvantage of incremental budgeting

Answer 3

Assumes activities and methods of working will continue in the same way.

The budget may become out of date, and no longer relate to level of activity or type of work being carried out.

Yeah, maybe Bush Terry slack built into the budget which is never reviewed

Question 4

Rolling budgets

Answer 4

Repaired more frequently than single budgets.

If you’re prepared, everyone three or six months and each budget covers the next 12 month period.

Question 5

Advantages of rolling budgets

Answer 5

The limit uncertainty by being able to update quickly as new information becomes available

Managers are forced to regularly reassess the assumptions they make

Planning and control decisions will be based on a plan that has been prepared recently

Question 6

Disadvantages of rolling budgets

Answer 6

Greater time and expenses needed on the budgeting process as more budgets are being prepared.

Managers may feel that the benefits of rolling budgets are limited, particularly if the assumption behind the budgets do not change very much overtime. 

Question 7

Zero-based budgeting

Answer 7

How much is the start signal every period and requires Manchester, justify every item of expenditure, even if the item has been accepted in previous periods

Every item that needs to be budgeted for is established as a decision package.

Each decision package is reviewed and ranked based on the benefits/importance to the organisation

Resources are there in allocated to the items in ranking order until all available resources are used up.

Question 8

Advantages of zero-based budgeting

Answer 8

Results in efficient allocation of resources as it is based on needs and benefits.

Increase the staff motivation by providing great initiative and responsibility in decision-making

Identifies in the laminate waste and obsolete operations.

Question 9

Disadvantage of zero-based budgeting

Answer 9

Difficult to define decision the units and decision packages as this is very time-consuming and exhaustive.

Force to justify every detail related to expenditure – e.g. RND department

Necessary to train managers. ZBB should be clearly understood by all.

Difficult to administer and communicate because more managers are involved in the process.

Question 10

Activity based budgeting

Answer 10

A method of budgeting based on an activity framework and utilising cost driver data in the budget setting and variance feedback process

Question 11

Advantages of activity based costing

Answer 11

Focuses on true drivers behind costs within an organisation

Will enable more efficient improvement programs to be implemented, because it considers the whole of a cost generating activity rather than just the cost itself

Question 12

Disadvantages of activity based budgeting

Answer 12

Time consuming and resource intensive

Concept is not as readily understood by managers within an organisation

Question 13

Challenges of budgeting for multinational companies

Answer 13

Budget target set in the home country currency may fluctuate when converted to another currency

Performance results in foreign subsidiaries may be affected by changes in exchange rates

Local regulations and political restrictions affecting choices made when budgeting

Differences in what customers want in different markets, resulting in additional local costs as products have to be adapted

Different local competitive environments, impacting upon decisions affecting budgeting 

Question 14

Budget to use for control purposes

Steps involved

Answer 14

Step, one -bbudget is prepared based on defined, corporate objectives

Step two – actual results are established during the budget period

Set three – action is taken following the variance investigation

Step four – new revised objectives are set.

Return to step one.

Question 15

Controllable cost

Answer 15

A cost, which can be controlled, typically by a cost, profit or investment centre manager 

Question 16

Allocation of uncontrollable items

Answer 16

Some uncontrollable items may be allocated to responsibility centres

Maybe in a position to influence these costs, even if they don’t control them, e.g. treatment of equipment to minimise maintenance costs incurred

Question 17

Steps involved in feedback control

Answer 17

Plan and set budget/target

Employee resources

Actual production and operations

Finish goods, revenues and costs

Measure and record outputs

Compare actuals with budget

Feedback to influence new plan

Feed forward to control and improve production and operations

Question 18

Feedforward

Answer 18

The forecasting of differences between forecast and planned/budgeted outcomes, and the implementation of action before the event to avoid such differences

Question 19

Effective budgetary control

Answer 19

Targets that are achievable but stretching

Clearly defined management responsibilities,

Reliable and timely, information systems and budget reports

Reports produced by individual managers.

Short reporting periods.

Effective feedback control – actions being taken promptly when significant variances are identified. 

Question 20

Fixed budget

Answer 20

Budget set prior to the control period and not subsequently change in response to changes in activity, cost or revenue. It may serve as a benchmark in performance evaluation.

Question 21

Budget flexing

Answer 21

Flexing variable costs from original budget levels to the allowances permitted for the actual volume achieved while maintaining fix costs at original budget levels 

Question 22

What is analysis?

Answer 22

Sometimes referred to as sensitivity analysis, involves changing the variables within your analysis to see what impact it has on the results 

Question 23

Important aspects of budgeting

Answer 23

Targets should be challenging, and if achieved will enable them organisation to move forward and grow.

They should act as effective targets for reward schemes, that will encourage staff to want to achieve them

Two significant factors that will influence the success of a budget are their achieveability and participation 

Question 24

Budget achievability

Answer 24

If too easily achieved in might promote laziness and lack of desire to excel

Staff would be able to gain rewards/bonuses for very average performance.

If a budget a set of ideal world assumptions, and hence unrealistic targets are set, staff will soon stop trying to achieve them as they know they cannot be hit 

Question 25

Participation in budgetary setting

Answer 25

The most after involved in the budgeting process, the better be in terms of buying in to the process.

Question 26

Top Down (imposed) budgeting

Answer 26

Budget process with budgets are set (by senior management), without permitting budget, holders the opportunity to participate in the budgeting process 

Question 27

Bottom up (participative) budgeting

Answer 27

Budgeting process in which all budget holders have the chance to participate in setting their own budgets 

Question 28

Advantages of top-down budgeting

(disadvantages of bottom up budgeting)

Answer 28

Consideration given to corporate strategy

Consideration given to overall resource allocation

More time, efficient as fewer people are involved

Coordination of plans and objectives.

More objective perspective,

Goal, congruence

Lack of budgetary slack. 

Question 29

Disadvantages of top Down (impose) budgeting

Advantages of bottom-up budgeting

Answer 29

More information and realistic budgets

Staff ownership of budgets, resulting in commitment to achieving them

Greater overall staff motivation

Less senior management time required

Encourages communication between departments 

Question 30

Dysfunctional behaviours in budgeting

Answer 30

Large orders may be placed to achieve quantity discounts leading to high inventories

Lower quality materials movie purchased leading to product. Quality issues.

Materials may be used, even if they are below standard leading to product quality issues.

Work may be rushed, resulting in errors and product, quality issues.

Production may be continued, even though there is no immediate requirement leading to high in Vantrease (to avoid idle time).

Question 31

Ethical aspects of budgeting

Bottom up approach

Answer 31

Budgetary slack – budget holders over/under estimate requirements to maintain or enhance their own position.

Producing unrealistic budgets to make budget holders look good, the temptation, then to manipulate actual results or use on ethical practices, such as aggressive, selling

Producing budgets that focus on showing budget holders in a favourable light short term, whilst causing long-term problems (e.g. cutting training costs)

Budgeted requirements, being determined by budget holders personal goals, right, then organisational objectives

Question 32

Ethical issues arising from top Down budgeting

Answer 32

Excessive pressure from above on budget holders to meet targets, they have not set

Giving budget holders the misleading impression that they are influencing budgets, resulting in demotivation budget orders, realise what is happening.

Passing to budget holders responsibility for costs they do not control. 

Question 33

Hope and Fraser 2003

Criticisms of the traditional approach

Answer 33

Budgets are time consuming and expensive

Budgets provide poor value to users.

Budgets failed to focus on shareholder value.

Budgets are too rigid and prevent fast response

Budgets, protect rather than reduce costs – use it or lose it.

Budget, stifle product and strategy innovation

Budgets focus on sales targets rather than customer satisfaction.

Budgets are divorced from strategy

Budgets reinforce a dependency culture

Budgets lead to unethical behaviours 

Question 34

Beyond budgeting

Definition

Answer 34

An idea that companies need to move beyond budgeting because of the inherent floors in budgeting, especially when used to set targets

A range of techniques, such as rolling, forecasts and market related targets, can take the place of traditional budgeting 

Question 35

Beyond budgeting versus additional management model

Two main concepts

Answer 35

A more adaptive way of managing in place of fixed annual budgets, that tie managers to predetermined actions, rolling targets are reviewed regularly and based on stretching goals, linked to performance against world-class benchmarks, competitors, and prior periods. Goals include customer satisfaction, resources utilisation, and innovation.

More focus place on future development of operations and cash forecasting rather than historic focus and emphasis on cost control.

This leads to increase motivation, higher productivity and better customer service.

Question 36

Benefits of beyond budgeting

Answer 36

Faster response time – more flexible and proactive

More innovation

Lower costs - managers see Costs as items to minimise rather than budget to spend 

Performance targets are based on competitive success and more flexible

Greater motivation for managers, due to decentralisation of responsibilities

Greater motivation for frontline staff, dealing with customers and suppliers

Better relations with customers and suppliers

Facilitates improvements in information systems throughout the organisation

Question 37

Disadvantages of beyond budgeting

Answer 37

More complex planning and coordination between different departments.

Difficulties in performance evaluation and hence reward determination

Emphasis on external focus resulting in lack of clarity of internal goals

Cost of investment in better information systems. Ie big data

Difficulties in changing to decentralised models.

Question 38

Responsibility, accounting

Answer 38

Budget holder should only be appraise against items of cost/revenue that they have control over.

This necessitates analysis of items into controllable cost revenues in uncontrollable ones.