6. Budgets: Control and Performance

Question 1

What is incremental budgeting?

Answer 1

Taking the current period and adding on an amount for anticipated inflation and growth

Question 2

What are the advantages of incremental budgeting?

Answer 2

1. Stable and change is gradual
2. Simple and easy to understand
3. Easy co-ordination

Question 3

What are the disadvantages of incremental budgeting?

Answer 3

1. Assumes activities will continue in the same way
2. Budget can become out of date
3. Budgetary slack is never reviewed

Question 4

What is a rolling budget?

Answer 4

Every new budget extends the current budget by another period

Question 5

What are the advantages of a rolling budget?

Answer 5

1. Limit uncertainty as they are updated quickly
2. Forced to regularly reassess assumptions
3. Decisions based on a plan produced recently

Question 6

What are the disadvantages of a rolling budget?

Answer 6

1. Large time and expenses

2. Benefits limited if assumptions don’t change much

Question 7

What are the attributes of zero based budgeting?

Answer 7

1. Starts at nil every period
2. Establish every item as a decision package
3. Justify each decision package individually, and review/rank based on benefits
4. Allocate resources based on the ranking

Question 8

What are the advantages of zero based budgeting?

Answer 8

1. Efficient allocation of resources
2. Increased staff motivation
3. Identifies and eliminates wastage

Question 9

What are the disadvantages of zero based budgeting?

Answer 9

1. Difficult to define decision packages
2. Time consuming
3. Difficult for R&D to justify expenditure
4. Lots of training needed
5. Difficult to administer and communicate

Question 10

What is 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

What are the advantages of activity based budgeting?

Answer 11

1. Focuses on true drivers behind costs

2. Enables more efficient improvement programmes

Question 12

What are the disadvantages of activity based budgeting?

Answer 12

1. Time consuming and resource intensive

2. Not readily understood

Question 13

What are the 5 budgeting challenges faced by multinational companies?

Answer 13

1. Home currency budget targets may fluctuate in other currencies due to exchange rates
2. Performance results affected by exchange rates
3. Local regulations and political restrictions affect decisions in different countries
4. Difference in customer preferences incurs additional costs of adaptation
5. Different local competitive environments

Question 14

What is a controllable cost?

Answer 14

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

Question 15

What is feedback control?

Answer 15

Actual results are compared to budgets/forecasts and relevant action is taken

Question 16

What are the two types of feedback that come from variance analysis?

Answer 16

1. Negative feedback (i.e. correct substandard performance)

2. Positive feedback (i.e. revise future targets/standards)

Question 17

What is feed-forward control?

Answer 17

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

Question 18

What are the 6 important elements of an effective control budget?

Answer 18

1. Targets are achievable but stretching
2. Clearly defined management responsibilities
3. Reliable and timely information systems and budget reports
4. Reports produced for individual managers
5. Short reporting periods
6. Effective feedback control

Question 19

What is what if/sensitivity analysis?

Answer 19

Changing the variables within your analysis to see what impact it has on results

Question 20

What are the aspects of budgeting that are important for staff motivation?

Answer 20

1. Challenging targets
2. Realistic, achievable targets
3. Use targets for reward schemes
4. Participative budget processes

Question 21

What are the 7 advantages of top down budgets?

Answer 21

1. Considers corporate strategy
2. Considers overall resource allocation
3. Time efficient
4. Co-ordination of plans and objectives
5. More objective perspective
6. Less budgetary slack can be built in
7. No concern of inexperienced staff

Question 22

What are the 5 disadvantages of top down budgets?

Answer 22

1. Lack of knowledge of operations
2. Staff not committed to budgets
3. Low staff motivation
4. More central/senior management time required
5. No communication between departments

Question 23

What are the 4 unethical behaviours that can arise in bottom up budgeting?

Answer 23

1. Budgetary slack
2. Producing unrealistic budgets to make budget holders look good
3. Short term focus
4. Personal goals influence decisions

Question 24

What are the 3 unethical behaviours that can arise in top down budgeting?

Answer 24

1. Excessive pressure from the top
2. Misleading budget holders, leading to demotivation
3. Passing budget holders responsibility for costs they do not control

Question 25

What are the two behavioural problems that can arise from the difficulty of setting standards in the modern environment?

Answer 25

1. Standards are ignored and their control benefits lost | 2. Operations are made to fit the standards rather than developed further

Question 26

Who proposed beyond budgeting?

Answer 26

Hope and Fraser (2003)

Question 27

What are two techniques that can be used in beyond budgeting?

Answer 27

Rolling forecasts and market related targets

Question 28

What are the 8 benefits of beyond budgeting?

Answer 28

1. Faster response time 2. More innovation 3. Lower costs 4. Flexible performance targets 5. Greater motivation for managers 6. Greater motivation of front line staff 7. Better relationships with customers and suppliers 8. Improvements in information systems

Question 29

What are the 5 disadvantages of beyond budgeting?

Answer 29

1. Complex process and co-ordination 2. Difficulties in performance evaluation 3. Lack of focus on internal goals 4. Cost of investment of better information systems 5. Difficulty in changing to decentralised model