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Year 2 Semester 2 > Accounting Topic 7 (Budgeting) > Flashcards

Accounting Topic 7 (Budgeting) Flashcards

1
Q

budget

A
  • financial plan (monetary) for implementing management decisions
  • showing the income generated, cost to be incurred and resources to be utilised for defined future period ofttimes
  • achieve org objectives
  • generally work well
  • Lots of businesses use them
  • Large stable org = budgets are way for you to have expectation of whats coming
  • Cost management mechanism
  • See whether did well or bad this year - extra tool
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2
Q

budgeting

A

implementation of long term plan for the year ahead through the development of detailed financial plans

-tied to strategy and planning, quantify plan, know resources and capital
- most important part of planning process of business

  • Sets objectives and long term plan
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3
Q

cash budget

A
  • aims to ensure that sufficient cash is available at all times
  • meet level of operations that are outlined in all other budgets
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4
Q

zero based budgeting (priority based budgeting)

A
  • projected expenditure for existing activities starts from base zero rather than last years budget
  • forcing managers to justify all budget expenditure, also known as (priority based budgeting)
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5
Q

incremental budgeting

A
  • existing operations and the current budgeted allowance for existing activities are taken as the starting point for preparing the next annual budget and are then adjusted for anticipated changes
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6
Q

beyond budgeting

A

describe alternative approaches such as rolling forecast = used instead of annual budgeting

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7
Q

2 functions of management accounting

A
  1. planning: developing objectives and preparing budgets to achieve objectives
  2. control: steps by management ensuring attainments of objectives, comparison of actual with expected results (variance analysis) -> undertake corrective action
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8
Q

strategic, planning, budgeting and control process

A

functions of management accounting

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9
Q

strategy

A
  • Prioritise customers
  • Prioritise product design = be competitive
  • Attract new customers
  • Have objective then want strategy = budget
  • Have strategy in place now we formulate strategy and quantify strategy
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10
Q

variance analysis

A
  • responding to deviations
  • inflation and unstable market conditions
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11
Q

role of budgeting in planning and control:

A

Planning: for goals and targets
- Resource allocation:allocate effectively resources = achieve goals
- Decision-making: provides a framework
- Appropriate supplier
- Performance evaluation: compare actual with expected results & take corrective action as needed
- Aspects: strong vs weak, & inefficient

Control: monitoring actual results and taking corrective action as needed, budgeting provides a mechanism for controlling costs and managing resources
- Manage costs throughout the year

Budgeting affects all of the hierarchy in the business

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12
Q

budgetary control

A

○ Part of the organisations system
○ Process integrated with other systems i.e. performance management, risk management and decision making
○ Involves different stakeholders, processes and external factors
More than just financial planning and monitoring

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13
Q

systems theory

A

organisations are complex systems consisting of different interdependent parts
○ Co exist, and affect eachother

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14
Q

contingency planning

A

planning for unexpected events or changes in the business environment that may affect the organisations revenue or expenses
- may include setting aside funds for emergencies or unexpected expenses

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15
Q

control required:

A
  • unpredictable disruptions
  • actual results (outputs) deviate from expected results
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16
Q

disturbances may include

A
  • rise in cost of raw materials
  • changes in demand
  • price war
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17
Q

control system must

A

ensure business capable of surviving disturbances

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18
Q

5 purpose of budgetary control

A

planning
responsibility
integration and coordination
motivation
evaluation and control
PRIME

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19
Q

8 problems in constructing budgets:

A
  1. Forecasting availability of resources
  2. Expected inflation should be included in calculations
  3. Tendency management to overstate expected costs
  4. Interdepartmental rivalries = dysfunctional behaviour
  5. Employees may resist budgets
  6. innovate & dynamic environments = stifle innovation/growth
  7. Top down = top decides and impose to employees = employees not happy and may resist management
  8. More business evolves and more dynamic market becomes = estimates are more and more inaccurate
    Estimate figures = always risking not the case when time comes
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20
Q

6 advantages of planning:

A
  1. formulate organisational goals and objectives
  2. identification of major strategic issues
  3. setting priorities for the use of scarce resources
  4. ensure integration of different activities
  5. developing and training future managers
  6. improve business performance
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21
Q

disadvantages of planning:

A
  1. rigidity/reactionism within the organisation
  2. dissuade management = no advantage of new opportunities
  3. difficult to set long-term plans in a dynamic environment
  4. expensive use of management time
  5. risk that plans are not implemented if commitment is lacking
22
Q

Basic framework of operating budgets

A
23
Q

budget preparation

A

operating budget

24
Q

operating budgets

A

common to have adjust either sales quantities or material purchases for inventories

25
Q

principle budget factor

A

limiting budget factor
factor preventing organisation from expanding beyond certain point
- if limiting factor exists its budget should be produced first and other budgets worked around it

26
Q

purpose of cash budgets

A
  1. Show expected level of liquidity
  2. Highlight periods to difficulty and allow for planning (e.g. borrowing or investment)
  3. Provide a basis for control
  4. Timing of cash flows
27
Q

Not all items in the cash budget are income statement items

A

Purchase or sale of non-current assets
Issue of shares or loan stock

28
Q

Not all income statement items will be in the cash budget

A

Depreciation
Provision for doubtful debts
Adjustments for accruals and prepayments

29
Q

fixed budget

A
  • Master budget
    • Prepared before the beginning of the budget period
    • Based on budgeted volumes and cost/revenues
    • Not adjusted regardless of the level of activity
      Not comparable
30
Q

flexible budget

A
  • Designed to adjust to the change in activity levels
  • Recognises behaviour of different costs (FCs vs VCs)
  • 2 uses
  • Example - very successful = more products, moderately = less
  • Budgets for different scenarios and different levels of activity
    Prepare different scenarios based on different possible outcomes and at the end you are going to use the closest to reality scenario and that can actually be comparable with what happens
31
Q

2 Uses of flexible budget

A
  1. Planning stage - prepare budgets at different levels of activity (what if scenario analysis)
  2. End of control period - compare actual with expected results (variance analysis)
32
Q

flexed budgets

A
  • Use of flexible budgets referred to as ascertaining the “budget cost allowance” or “flexed budget”
  • Prepared based on actual volumes for budgetary control purposes
  • More meaningful performance evaluation tool = like for like comparison
  • Forms the basis for standard variance analysis - actual activity should have cost

-similar to flexible budgets, only difference is that flexed budgets are prepared at the end of period, first prepare fixed/master then know figures and take actual results and use actual quantity and measure it based on the budgeted cost

33
Q

flexible/flexed budget purpose

A
  • Manage different activity levels to keep budget meaningful
  • Useful at planning stage to show different results from possible activity levels - build in scenarios
  • Necessary as control device (compare actual results with flexible budget)
34
Q

incremental budget

A
  • Current years budget + extra amount
    • Make it quick and easy works in stable businesses that aren’t in a dynamic environment
      ○ Extra amount = estimated growth or inflation
      Not cost effective!
35
Q

advantages of incremental budget

A

1- Simple, low cost form of budgeting
2- If stable business - may be sufficient for needs
3- Some generic expenses (e.g. telephone) may be the simplest way of managing the budget

36
Q

disadvantages of incremental budget

A

1- Assume current levels will be maintained
2- Backward looking in nature, therefore inappropriate (e.g. if overpaying we will add inflation onto that and in reality manager is inefficient as could get better price, costs not managed well will continue)
3- Deskbound - driven by accountant
4- Performance targets often challenging - doesn’t encourage improvements/efficiency gains

37
Q

zero based budgeting (priority based budgeting)

A
  • Allocates resources efficiently - reduces waste and increases efficiency
  • Starts with premise that next year’s budget is zero
  • Each item justified in its entirety before inclusion
  • Cost benefit analysis undertaken on each item to grant priority most beneficial, lowest cost highest benefits)
  • useful in public sector organisations
  • Not particularly useful in manufacturing
38
Q

advantages of zero based budgeting

A

1- Can identify and remove inefficient/obsolete operations
2- Necessitates close examination of organisations operations
Results in a more efficient allocation of resources

39
Q

disadvantages of zero based budgeting

A

1- May emphasise short term benefits to determent of longer term goals
2- May need skills not available in organisations
3- Resistance from employees
4- Time and effort required
5- Ranking activities is very difficult

40
Q

rolling budget (continuous budget)

A
  • Useful when facing a period of uncertainty - difficult to prepare accurate forecasts (too dynamic and ever changing)
  • Shortens period between preparing budgets
  • Prepare budgets monthly/quarterly for next full period
  • Cash budgets usually prepared on a rolling basis
  • Good for efficiency, works under conditions of uncertainty
    Time consuming as management has to keep working on it every time
41
Q

advantages of rolling budget (continuous budget)

A

1- Reduce the element of uncertainty
2- Managers have to regularly reassess the budget
3- Planning and control based on a more recent plan
4 -The budget always extends for some time into future

42
Q

disadvantages of rolling budget

A

1- Effort and expense required to update the budget
2 demotivate managers if cant see the benefit of regular revisions

43
Q

activity based budgeting

A
  • Method of budgeting based on an activity framework and utilising cost driver data in the budget setting and variance feedback process
    ○ Define activities that underlie the financial figures in each function
    ○ Use level of activity to determine amount of resource to allocate
    ○ Explain variances
  • Recognises
    ○ Cost drivers
    ○ Controlling cost drivers as opposed to costs
    ○ Not all activities are value-adding
    ○ Demand and decisions beyond control of departmental manager drive many departmental activities
    • Create budget based on activities that drive these costs
    • Managing the activities that drive the costs
      Based on activity framework and utilising cost driver data in budget setting and variance feedback process
44
Q

advantages of activity based budgeting

A

1- Focus on overhead activities
2- Controls information
3 - Links to other improvement techniques

45
Q

disadvantages of activity based budgeting

A

1- Time consuming
2- Suitability
3 - Identifying responsibility for cost drivers

46
Q

behavioural aspects of budgeting

A
  1. Set challenging but achievable budgets, good performance bonuses/reward schemes, to motivate employees
  2. Impact on human behaviour
  3. Budget pressure units employees against management = -ve
  4. Workers sometimes feel victimised - loss of confidence and motivation results
  5. Supervisors use budgets as an expression of their position of superiority

Motivation and budget setting
1. Best performance when budget is challenging but achievable
2. Goal congruence - goals of management aligned with organisational goals
3. Controls not too rigid as to constrain organisation
4. Participation in budgeting
- Top down system
- Bottom up system - budget holder invited to have input at the budget setting stage, participate in budgeting and market targets that are realistic, all local employees in local departments collect realistic info and estimates and this is adjsuted by top management according to strategy/objective for the year
§ Advantages:
□ More detailed ‘local’ info used in budget setting process
□ Morale and motivation is improved
□ Increased likelihood of achievement
Long process, for approval

47
Q

Top Down system

A

budgets imposed on individuals by managers
Advantages:
- quicker
- Avoid budgetary slack and budget bias
- Utilise senior management awareness of total resource availability
- Avoids taking local management away from day-to-day duties
- May take opposition and unit against management, very autocratic, employees are not happy, managers come and express their authority, employee will try deliberately to need meet the demand, lot of pressure on employees

48
Q

Bottom Up system

A
  • budget holder invited to have input at the budget setting stage, participate in budgeting and market targets that are realistic, all local employees in local departments collect realistic info and estimates and this is adjsuted by top management according to strategy/objective for the year

-Advantages:
-More detailed ‘local’ info used in budget setting process
- Morale and motivation is improved
- Increased likelihood of achievement
Long process, for approval

49
Q

2 underlying concepts of beyond budgeting

A
  1. Adaptive management processes
    i. Planning on a rolling basis
    ii. Focus on cash forecasts not cost control
    iii. KPIs referenced to external benchmarks such as competitors
  2. Decentralised management
    i. Managers empowered to make decisions (speeds up response times and exploits opportunities)
    ii. Responsibility drives motivation - rewards are team based
    Customer orientated teams are established
50
Q

criticisms of budgeting

A

1-expensive
2-stifle innovation, expensive and has to go through approval, long and annoying process, limit growth :
3-Time consuming and adds little value
4-Insufficient external focus
5- Too rigid and prevents rapid response
6-Protects rather than reduces costs

Year 2 Semester 2 (16 decks)

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