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ACCA F5: Performance Management > Budgetary Systems > Flashcards

Budgetary Systems Flashcards

1
Q

What is budgeting?

A

Budgeting is part of the overall process of planning and control.

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2
Q

What is a budget?

A

A budget is a financial/quantitative plan of operations for a forthcoming period.

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3
Q

What is the purpose of budgetary control?

A

PRIME;

P - Planning
R - Responsibility
I - Integration and Co-ordination (goal congruence)
M - Motivation (target setting/rewards)
E - Evaluation & Control
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4
Q

What is the purpose of planning?

A

Setting out what it is that we are trying to achieve. Presents a firm commitment of what the organisation is endeavoring to do.

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5
Q

What is the planning and control cycle?

A
  1. Determine objectives
  2. Planning a set budget - i.e. split into controlled periods.
  3. Operate in line with objectives
  4. Compare actuals with budget
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6
Q

How many budgetary systems are there?

A

Seven.

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7
Q

What are the seven budgetary systems?

A
  • Fixed
  • Flexible
  • Flexed
  • Incremental
  • Activity Based
  • Zero Based
  • Rolling
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8
Q

What is a fixed budget?

A

A fixed budget is one that is not adjusted regardless of the level of activity attained in a period.

It is the master budget prepared before the beginning of the budget period.

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9
Q

Evaluate the pros and cons of a fixed budget

A

Pro: Sets out one clear target
Con: Becomes out of date quickly
Con: Often unrealistic because activity level is likely to differ from original forecasts.

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10
Q

What is a flexible budget?

A

A flexible budget is one that is designed to change as the volume of activity changes.

Enables what if scenarios such as most likely and best/worst case scenarios.

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11
Q

Evaluate the pros and cons of a flexible budget.

A

Pro: useful at the planning stage
Pro: Different results from various activity levels allow better planning for future uncertainty.

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12
Q

What is a flexed budget?

A

A budget that is flexed to reflect the actual activity level achieved in a given period before the comparison to actuals and variance analysis can begin.

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13
Q

Evaluate the pros and cons of a flexed budget

A

Pro: Budget restated based on actual volumes
Pro: Useful for control
Pro: Provides like for like comparison and meaningful variances

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14
Q

What is incremental budgeting?

A

Budget based on current year plus extra amounts for estimated growth or nflatiom.

Traditionally used where there are stable environments i.e. the public sector.

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15
Q

Evaluate the pros and cons of incremental budgeting.

A

Pro: Easy to do
Cons: Unnecessary spending
Cons: Builds in slack which doesn’t get stripped out and inefficiencies
Con; No business scrutiny.

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16
Q

What is zero based budgeting?

A

ZBB is based on the premise that next year’s budget is zero thus every item of expenditure or activity (decision package) must be justified in its entirety before it can be included in the budget.

17
Q

What is the three-step approach to ZBB?

A
  1. Define decision packages
  2. Evaluate and rank packages
  3. Allocate resources
18
Q

What are the advantages of ZBB?

A
  • Identifies and removes inefficient or obsolete operations
  • Necessitates close examination of organisation’s operations
  • Results in a more efficient allocation of resources.
19
Q

What are the disadvantages of ZBB?

A
  • May emphasise short-term benefits to detriment of longer term goals
  • May need skills not available in organisation
  • Resistance from emloyees
  • Time and effort required
  • Ranking activities is very difficult
20
Q

What is a rolling budget?

A

A rolling budget is a continuously evolving plan of the next 12 months so that the current budget is extended by an extra period as the current period ends.

21
Q

What is the main aim of a rolling budget?

A

Rolling budgets attempt to prepare targets and plans which are more realistic and certain by shortening the period between preparing budgets.

22
Q

When are rolling budgets useful?

A

In times of uncertainty which make it difficult to prepare accurate forecasts.

23
Q

What are the advantages of rolling budgets?

A
  1. Reduce uncertainty
  2. Budget is regularly reassessed by management
  3. Planning and control based on a more recent plan
  4. Budget always extends for sometime into the future.
24
Q

What are the disadvantages of rolling budgets?

A
  1. Effort and expense required to continuously update the budget
  2. May demotivate managers if targets keep moving.
25
Q

What is activity based budgeting?

A

Building up budgets by activity rather than by department.

26
Q

What are the recognition criteria in ABB?

A
  1. activities drive costs
  2. divers of costs should be controlled rather than costs themselves.
  3. not all activities are value-adding
  4. demand and decisions in a dept. may be beyond control of dept. manager.
  5. traditional financial measures of performance are unable to fulfil objective of continuous improvement,
27
Q

When changing a budgetary system, what do we need to bare in mind?

A
  • employee resistance
  • cost of change
  • learning curve
  • training needs
28
Q

What is the purpose of budgetary controls?

A

Budget systems must be controlled to keep it steady or make safe changes.

Unpredictable distrurbances can arise and enter the system causing actuals to deviate from expected results.

29
Q

Give three examples of disturbances that can impact a business system.

A
  1. Rise in cost of raw materials
  2. Changes in demand levels
  3. Price war.
30
Q

What are the components of a controlled system?

A
  • meaningful target/standard (target)
  • method of gathering information (sensor)
  • method of comparing information to a standard (comparator)
  • the means to initiate control action (effector)
31
Q

What is the flow of information through a system known as?

A

A feedback loop

32
Q

What is the difference between a single and double feedback loop?

A
  • single, internal environment, fixed costs

- double, external environment

33
Q

What is a controllable cost?

A

One that can be influenced by the budget holder.

34
Q

What is an uncontrollable cost?

A

Costs that cannot be changed by the budget holder or management within a given time period.

35
Q

What is the aim of responsibility accounting?

A

It associates costs and revenues with the managers that can control them and so distinguishes between controllable and uncontrollable costs.

36
Q

What is feedback control?

A

A reactive action that takes place after the event.

i.e. variance analysis

37
Q

What is feedforward control?

A

Proactive action that takes place during the event.

i.e. cash budget

ACCA F5: Performance Management (10 decks)

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