Budgets (2)

Question 1

What is top-down budgeting/

Answer 1

When budget targets are set at senior management level for the organisation as a whole and for each major department within the organisation

Question 2

What happens with top-down budgeting?

Answer 2

Departmental budget targets are given to departmental managers => managers are required to prepare a budget that confirms to targets that have been imposed on them from above

Question 3

When budgets have been set at departmental level for top-down budgeting?

Answer 3

Targets are then given to managers lower down the organisation hierarchy => these managers then meet targets imposed on them for their area of operation

Question 4

What is bottom-up budgeting?

Answer 4

When budgeting process starts at a relatively low level of management

Question 5

What happens with bottom-up budgeting?

Answer 5

Managers are required to draft a budget for their area => submitted to superior who then combines it for the department as a whole => submitted to senior maangement where they are combined into a co-ordinated budget for organisaiton as a whole

Question 6

Advantage of top-down budgeting? (time-consuming)

Answer 6

Takes much less time and planning effort than bottom-up budgeting, and senior management can use top-down budgets to impose their views

Question 7

Disadvantage of bottom-up budgeting? (revision)

Answer 7

May have to be revised many times until theu are properly co-ordinated

Question 8

Advantage of bottom-up budgeting (reflection)

Answer 8

Reflects the views and expectations of managers who are closer to operations and who may have a better understanding of what is and what is not achievable

Question 9

Advantage of bottom-up budgeting (participative)

Answer 9

A form of participative budgeting process, which can have behavioural and motivational advantages

Question 10

What is a fixed budget?

Answer 10

A budget which remains unchanged throughout the budget period, regardless of any difference between actual and original planned volume of output or sales

Question 11

Fixed budget simplified?

Answer 11

The master budget

Question 12

Main purpose of fixed budget/

Answer 12

For planning. Used to define the objectives and targets of the organisation for the budget period

Question 13

Issue with fixed budgets?

Answer 13

Often unrealistic as actual level of activity will almost certainly be different from level of activity originally planned

Question 14

What is a flexible budget?

Answer 14

Changed as the volume of output and sales changes. Recognises cost behaviour by changing sales revenue, variable costs and fixed costs in line with activity levels

Question 15

When is a flexible budget used?

Answer 15

In plannnig to show different results from various possible activity levels allowing better planning for uncertainty in the future

Question 16

When do budgets need to be flexed?

Answer 16

At the control stage to reflect the actual activity level achieved in a given period before budget can meaningfully be compared with actual results and variance analysis performed

Question 17

What is a flexed budget?

Answer 17

A revised budget that reflects actual activity levels achieved in budget period. Flexible budget however is prepared in planning stage

Question 18

How is a flexed budget used?

Answer 18

Retrospectively to compare actual results achieved with what results should have been under the circumstances

Question 19

Purpose of flexible/flexed budget (activity levels)

Answer 19

Designed to cope with different activity levels to keep budget meaningful and hence preserve relevance of variances for effective control

Question 20

Purpose of flexible/flexed budget (planning)

Answer 20

Useful at planning stage to show different results from possible activity levels

Question 21

Purpose of flexible/flexed budget (control device)

Answer 21

Necessary as control device as we can meaningfully compare actual reuslts with relevant flexible budget