Budgeting

Question 1

What is a budget?

Answer 1

quantitative expression of a plan for a defined period of time (planned sales, volumes, revenues, resource quantities, expenses, assets, cash flows)

Question 2

What are the main benefits of a budget?

Answer 2

Control- a budget helps to control the organisation by making it create a plan
Responsibility- a budget will identify who is responsible for what
Integration- a budget will ensure that activities of the different parts of the organisation are integrated together (comms and coord)
Motivation- help motivate staff
Evaluation- evaluate actual results

Question 3

What is the PBF?

Answer 3

limits the activities of an undertaking- starting point of the budgeting process (most often this is sales)

Question 4

What are the steps of budgeting?

Answer 4

1. Sales budget (if PBF)
2. Production Budget
3. raw materials, labour and production overhead
4. cost of sales budget
5. selling and distribution and general/admin cost budget
6. master budget (statement of profit/loss, cash budget, statement of financial position)
   - maybe Capital expenditure budget

Question 5

What is a cash budget?- this is for NON-CURRENT ASSETS

Answer 5

Everything that enters or leaves the bank account (includes everything in production, revenues, capital items)
manage liquidity

Question 6

How do payments and receipts work?

Answer 6

receipts should be higher than payments otherwise loss(cash shortage)

Question 7

What to do if there is a cash shortage?

Answer 7

Short term-
-organise overdraft 
-offer customer a discount to pay early 
-Delay paying suppliers
Long term:
-raise other finance (loans)

Question 8

Cash surplus?

Answer 8

• offer more generous terms to customers
• arrange to pay off some finance (loans)
• organise to put surplus on deposit on money markets

Question 9

What is a capital expenditure budget?

Answer 9

different from a cash budget as it takes into account current assets expenditure (ie new buildings) as can have big impact on cash flow and profitability

Question 10

What is a depreciation budget?

Answer 10

usually told by how much the asset depreciates (number of months held divided by total months in the year, then times the % depreciation, then times the cost of the asset)
be aware of how much of the year we held the asset!

Question 11

What is a budget committee?

Answer 11

co-ordinates the preparation and admin of budgets

Question 12

budget period?

Answer 12

time period for which a budget is prepared

Question 13

budget manual?

Answer 13

set of instructions that spending officials are expected to follow

Question 14

Budgetary slack?

Answer 14

managers try to overestimate expenses or under estimate revenues to try and make sure budget meets targets

Question 15

periodic budget?

Answer 15

shows costs and revenues for a period of time is updated each period

Question 16

Rolling budget?

Answer 16

having been established at the beginning of the period, it is then constantly updated/amended/extended

Question 17

What are the uses of rolling budgets?

Answer 17

• at times of uncertainty surrounding resources/prices, regular revisions help with more control
• encourages staff to continually be looking at external and internal variables

Question 18

What are the issues with rolling budgets?

Answer 18

• involves time and effort
• concept not readily understood by managers
• continually changing the goals posts ban be de-motivating

Question 19

What are incremental budgets?

Answer 19

base budget on last years budget and make adjustments for known variables such as inflation and growth

Question 20

What are the uses of incremental budgets?

Answer 20

• budget is stable and gradual
• everyone treated the same
• easy to coordinate
• can see impact quickly
• managers can operate on a consistent basis

Question 21

Issues with incremental budgets?

Answer 21

• no incentive to reduce cost
• encourages spending up to the budget
• no incentive for new ideas
• assumes organisations continue to work in the same way
• budget may become out of date
• priority for resources may have changed since budget set
• budgetary slack built in may not be reviewed

Question 22

what is a zero- based budget?

Answer 22

Opposite of incremental

requires managers to justify every item of expenditure (even if that item had been accepted previously)

Question 23

uses of zero-based budgets?

Answer 23

-very responses to changes in econ activity
-very efficient
-removes all budgetary slack
-encourages managers to improve processes, improves motivation
-eliminate wastage
-increased communication and coordination
creates culture of questioning

Question 24

Problems with zero based budgeting?

Answer 24

• very time consuming
• who gets priority?
• R&D for example suffer as cant show short term benefit
• necessary to train managers
• difficult to administer
• volume of data may be unmanageable
• incentive for budgetary slack
• may prevent managers reacting to changed circumstances once budget set

Question 25

What is a top-down (imposed) budget?

Answer 25

overall corporate objectives by senior management and then working down through levels of organisation

Question 26

What is bottom up budget

Answer 26

individual and departmental objectives set by local management- lower, appropriate budgets set

Question 27

What is the first decision regarding the budget?

Answer 27

first establish what type of budget and then who sets it

Question 28

What are advantages of bottom up budgeting?

Answer 28

- budgets formed by those close to the action - staff take ownership of budget - greater motivation and participation - doesnt take up senior management time - encourages inter departmental communication

Question 29

What are disads of bottom up budgeting?

Answer 29

- can create disfunctional behaviour- budgets fit local rather than company objectives - more scope for staff disagreements - lack of coherence - more time consuming and costly - budgetary slack may be built in - may be inaccurate if less experienced managers are in place