Ch9: Budgetary Control Systems

Question 1

What is the purpose of Budgetary Control Systems?

Answer 1

Achieve financial control of an entity through PRIME =
(1) Planning
(2) Responsibility
(3) Integration & Coordination
(4) Motivation
(5) Evaluation & Control

Question 2

What does the ‘P’ in PRIME stand for in Budgetary Control Systems?

Answer 2

PLANNING - Preparing budgets which forces managers to think about the budget period, consider market conditions, and make better long-term decisions.

Question 3

What does the ‘R’ in PRIME stand for in Budgetary Control Systems?

Answer 3

RESPONSIBILITY - Delegating responsibility by showing managers which revenues and costs they are responsible for.

Question 4

What does the ‘I’ in PRIME stand for in Budgetary Control Systems?

Answer 4

INTEGRATION & COORDINATION - Leading to better resource utilisation and guiding decisions such as ordering inventory and hiring staff.

Question 5

What does the ‘M’ in PRIME stand for in Budgetary Control Systems?

Answer 5

MOTIVATION - Giving managers a target in the form of a budget may improve their performance, though overly difficult targets can demotivate them.

Question 6

What does the ‘E’ in PRIME stand for in Budgetary Control Systems?

Answer 6

EVALUATION & CONTROL - Managers are evaluated by their performance against the budget, and some organizations may give bonuses based on this evaluation.

Question 7

What is the typical duration of a budget in Long-Term Planning?

Answer 7

A budget typically covers 12 months.

Question 8

What is the starting point for Long-Term Planning?

Answer 8

START POINT = Mission - strategic objectives of the organisation and how it is to be done.

Question 9

What are the components of the Performance Hierarchy in Long-Term Planning?

Answer 9

The components are
(1) Mission
(2) Strategic Objectives
(3) Business Unit Objectives.

Question 10

[1]
What is included in a Mission Statement?

Answer 10

• The reason for the entity’s existence.
• Type of business.
• Policies and standards of behavior.
• Values and culture.

Question 11

[2]
What are Strategic Objectives?

Answer 11

More concrete and specific goals that state what the organization must do to achieve its mission, such as increasing revenue by 10% each year.

Question 12

What is a Master Budget?

Answer 12

• Consolidated budget of all the other budgets.
• Goes through approval from the BoD.

Question 13

What are Functional Budgets?

Answer 13

Budgets for specific business segments like Profit Centre’s and Investment Centre’s, which involve identifying the principal budgeting factor and preparing related budgets.

Question 14

What is Top-Down Budgeting?

Answer 14

• SENIOR MANAGEMENT prepares the budgets.
• Set departmental targets, which are then given to lower-level managers to meet.

Question 15

Advantages of Top-Down Budgeting

Answer 15

• Focus more on organisational growth.
• Better coordination - provides each department with a clearer picture and expectations.
• Less time consuming.
• Senior Managers have more control over budgets = Reflected more accurately to corporate objectives and long-term planning.
• Avoids Budgetary Slack.

Question 16

Disadvantages of Top-Down Budgeting

Answer 16

• May not provide enough details.
• May create unrealistic expectations.
• May cause resentment within lower management.
• Less accurate.

Question 17

How does Top-Down Budgeting link to PRIME?

Answer 17

PLANNING -

RESPONSIBILITY -

INTEGRATION & COORDINATION -

MOTIVATION -

EVALUATION -

Question 18

What is Bottom-Up Budgeting?

Answer 18

• MANAGERS participate in preparing their department’s budgets.
• It is then combined into a coordinated budget for the organisation as a whole by SENIOR MANAGERS.

Question 19

Advantages of Bottom-Up Budgeting

Answer 19

• Reflects the views and expectations of managers who are less closer to the operations. They may then have a better understanding of what is what is not achievable.
• Form of a participative budgeting process - which can have behavioural and motivational benefits.
• Collaborative = Managers would feel more motivated as will be given more autonomy and more responsibility within their departments.

Question 20

Disadvantages of Bottom-Up Budgeting

Answer 20

• You may give yourself softer targets = MORE LENIENCY.
• BUDGETARY SLACK = this is the intentional underestimation of budgeted revenues or overestimation of budgeted costs to make budgets easier to achieve.
• Time consuming - draft budgets may need to be revised many times before it is properly coordinated.

Question 21

How does Bottom-Up Budgeting link to PRIME?

Answer 21

PLANNING - forces managers to take time away from managing day-to-day operations to plan.

RESPONSIBILITY -

INTEGRATION & COORDINATION - coordination of various departments in budgeting is easier if performed centrally and there is less participation.

MOTIVATION - more motivated because managers will feel as though they have more control.

EVALUATION - budgets must be set appropriately and needs to be achievable if evaluated against performance. This could also lead to a risk of budgetary slack.

Question 22

What are Rolling Budgets?

Answer 22

Budgets that are continuously updated by adding another month or quarter to the end of the budgeted period as each month/quarter expires.

Question 23

Advantages of Rolling Budgets

Answer 23

• REDUCES UNCERTAINTY - as it focuses on detailed planning and control on short-term prospects where the degree of uncertainty is much smaller.
• Managers have to regularly REASSES THE BUDGET = Makes it more realistic as It takes account recent performances.
• PLANNING AND CONTROL will be based on a more recent plan.
• Budget is continuous and will always extend a number of months ahead = Encourages managers to think about the future.

Question 24

Disadvantages of Rolling Budgets

Answer 24

• Effort and expense are required to continuously update the budget = Time consuming.
• May demotivate managers if they cannot see the benefits on a regular revision.
• Each revised budget may require revision of standards or inventory valuations.
  = This could put additional pressure on the accounts department each time rolling budget is prepared.

Question 25

How does Rolling Budgets link to PRIME?

Answer 25

PLANNING - RESPONSIBILITY - INTEGRATION & COORDINATION - MOTIVATION - EVALUATION -

Question 26

What is Incremental Budgeting?

Answer 26

A budgeting method based on the previous period’s budget or actual performance, with an incremental amount added for the new budget.

Question 27

Advantages of Incremental Budgeting.

Answer 27

- Simple, cheap and easy to understand = - Quick to administer. - Useful for stable businesses with good cost control. - Coordination between budgets is easier to achieve, as increments in functional budgets are easily aggregated into master budgets. - The effect of change can be seen quickly.

Question 28

Disadvantages of Incremental Budgeting

Answer 28

- Doesn’t identify inefficient operations - assumes activities and methods of working will continue in the same way regardless of whether they are needed or not. - BUDGETARY SLACK (deliberately over-estimating or under-estimating revenues) - once it has been introduced it will be protected or carried forward into future periods. - Not suitable for changing environments, as it is based on the past and assumes that activities will continue to be the same. - Encourages managers to spend up their budget because if they do not the budget is likely to be cut in the next period. - Doesn’t produce challenging performance targets or encourages managers to find ways to improve the business.

Question 29

How does Incremental Budgeting link to PRIME?

Answer 29

PLANNING - RESPONSIBILITY - INTEGRATION & COORDINATION - MOTIVATION - EVALUATION -

Question 30

What is Zero-Based Budgeting (ZBB)?

Answer 30

A budgeting method that requires each cost element to be specifically justified as though the activities were being undertaken for the first time.

Question 31

Why would Zero-Based Budgeting be used?

Answer 31

Technique used to allocate resources more efficiently = Reduces wastage and increases efficiency.

Question 32

Advantages of Zero-Based Budgeting

Answer 32

- Makes it possible to identify and remove inefficient or obsolete operations. - It necessitates close examinations of organisations operations. - It results in a more efficient allocation of resources and challenges the status quo. - It responds to changes in the business environment. - Forces budget setters to re-evaluate every activity and any obsolete activities can be removed. - Encourages a BOTTOM-UP approach to budgeting.

Question 33

Disadvantages of Zero-Based Budgeting

Answer 33

- Volume of extra paperwork created = Each package must have costs and benefits and this must be continuously updated. Also new packages will be developed as new activities emerge. - Short-term benefits might be emphasised to the detriment of long-term benefits (i.e. looks at 1 year at a time). - Managers need to be trained with ZBB techniques. - Ranking process may be difficult: (1) A large number of packages may need to be ranked. (2) It can be difficult to rank packages that appears to be equally vital. (3) Difficult to rank if they have qualitative rather than quantitative benefits (e.g. spending on staff welfare and working conditions). (4) Top-level management may not have the time or knowledge to rank all.

Question 34

How does Zero-Based Budgeting link to PRIME?

Answer 34

PLANNING - RESPONSIBILITY - INTEGRATION & COORDINATION - MOTIVATION - EVALUATION -

Question 35

What is Activity-Based Budgeting (ABB)?

Answer 35

Uses costs determined using Activity-Based Costing (ABC) as a basis for preparing budgets, focusing on controlling cost drivers.

Question 36

Advantages of Activity Based Budgeting.

Answer 36

- Management’s attention is focused on the activities of the organisation. These are something that management can control more easily than focusing on total costs. - A better understanding of what causes costs to be incurred may provide opportunity for cost reductions. - May identify ‘non-value adding’ activities which can be eliminated.

Question 37

Disadvantages of Activity Based Budgeting.

Answer 37

- It is complicated and expensive to implement as it requires detailed analysis of overheads and measuring of activities. - As many FC do not vary with changes in the volume of drivers in the short-run, ABB may provide misleading information. - The people handling the ABB need to have a good understanding of the businesses processes, which can be quite difficult especially in businesses with complex production cycles.

Question 38

How Activity Based Budgeting links to PRIME?

Answer 38

PLANNING - RESPONSIBILITY - INTEGRATION & COORDINATION - MOTIVATION - EVALUATION -

Question 39

What is Feedback Control in budgeting?

Answer 39

A system where the results/outputs of a system are used to control it by adjusting the input or behavior of the system, comparing actual results with planned results.

Question 40

Identify and explain the 2 types of Feedback Control Systems

Answer 40

- SINGLE LOOP FEEDBACK - what can we do to sell more? - DOUBLE LOOP FEEDBACK - Haven’t been able to sell as much as expected, so is it worth still selling?

Question 41

What is Feed-Forward Control in budgeting?

Answer 41

A system where predicted future results are compared against the desired outcome, and action is taken now to ensure the desired results are achieved.

Question 42

What is Positive Feedback in budgeting?

Answer 42

Control action continues the current course as everything is going according to plan, and output has achieved or exceeded the plan.

Question 43

What is Negative Feedback in budgeting?

Answer 43

Indicates that results or activities must be brought back on course as they are deviating from the plan, requiring corrective actions.

Question 44

What are Closed-Loop Systems in budgeting?

Answer 44

Systems with feedback that are reactive, focusing on comparing actual results with aims and taking control actions to minimize future variances.

Question 45

What are Open-Loop Systems in budgeting?

Answer 45

Systems without feedback, either because (1) Feedback is not produced (2) Feedback is produced but not used appropriately.

Question 46

What are the difficulties of changing budgetary systems?

Answer 46

- Resistance to change - Scepticism - managers who do not understand the full benefit of the change may not give their full support. - Training requirements. - Additional time and costs involved in moving to a new system.

Question 47

What are Flexible Budgets?

Answer 47

- Future focused. - Budgets that change as the volume of output and sales change. - Used at the planning stage to show different results from various possible activity levels.

Question 48

What are Flexed Budgets?

Answer 48

- Historically focused. - Revised budgets that reflect the actual activity levels achieved in the budget period, used retrospectively to compare actual results with what should have been achieved.

Question 49

What is the Beyond Budgeting Model?

Answer 49

A set of guiding principles to manage performance and decentralize decision-making without traditional budgets, focusing on KPIs and stretch goals.

Question 50

What are the advantages of the Beyond Budgeting Model?

Answer 50

- Encourages innovation. - Increases motivation. - Allows faster responses to threats and opportunities. - Focuses on competitive success and customer needs.

Question 51

Acronym for gathering Quality Information

Answer 51

ACCURATE = A - Accurate C - Complete C - Cost Effective U - User Focused R - Relevant A - Authoritative T - Timeliness E - Easy to use.

Question 52

Difference between Traditional Budgeting and Beyond Budgeting in regards to - (1) GOALS

Answer 52

TRADITIONAL = - Short-term focus - Fixed annual targets drive short-term actions. BEYOND = - Long-term focus. - KPIs - Competitive success.

Question 53

Difference between Traditional Budgeting and Beyond Budgeting in regards to - (2) REWARDS

Answer 53

TRADITIONAL = - Individual departments have their own targets to meet. - May mean different departments won’t share skills, expertise and information with each other. BEYOND = - Recognises team-based success is important - Everyone is part of one team.

Question 54

Difference between Traditional Budgeting and Beyond Budgeting in regards to - (3) PLANS

Answer 54

TRADITIONAL = - Predict and Control BEYOND = - Future is unpredictable - Plans need to continuously change and be updated.