Business planning and budgeting

Question 1

The planning and control process
5 steps

Answer 1

1. Identify organisational goals
2. Develop strategies and plans
3. Develop budgets
4. Monitor performance against budget
5. Re-evaluate goals

Question 2

Levels of budget

Answer 2

• Master budget
• Business unit budgets
• Functional budgets

Question 3

Types of budget: FIXED BUDGET

Answer 3

• Prepared for one budgeted level of activity.
• Actual results compared with the original budget.
• Appropriate for organisations with limited resources, or little variety of level of activity.

Question 4

Types of budget: FLEXIBLE BUDGET

Answer 4

• Amend original budget to allow for differences between actual level of activity and budgeted level.
• Actual results compared with flexed budget.
• Used when level of activity is likely to vary.

Question 5

3 approaches to budgeting

Answer 5

• Incremental
• Top-down
• Bottom-up

Question 6

Incremental budgeting

Answer 6

Traditional
- Take previous year’s figures and adjust for changes

• Easy, but doesn’t adapt well to sudden changes in business environment. and may perpetuate existing inefficiencies.

Question 7

Top-down budgeting approach

Answer 7

• Senior managers produce master budget + develop activity targets and expenditure limits through the organisation.
• Likely to achieve organisational goals and efficient communication of plans.
• BUT, employees may not feel valued, so low commitment

Question 8

Bottom-up budgeting approach

Answer 8

• Budget proposals produced within each section of the organisation, fed up.
• Greater involvement of staff and their expertise,
  BUT, time-consuming, difficult to ensure congruence with organisational goals.

Question 9

The Master Budget

Answer 9

= A summary of all functional budgets. Includes:

• Cash budget
  -Budgeted income statement
• Budgeted balance sheet