Ch9: Budgetary Control Systems Flashcards
(1) Budgetary Control Systems (2) Long-Term Planning (3) Master Budget (4) Functional Budget (5) Budgetary Systems - Top-Down and Bottom-Up Budgeting (6) Budgetary Systems - Rolling Budgets (7) Budgetary Systems - Incremental Budgeting (8) Budgetary Systems - Zero-Based Budgeting (ZBB) (9) Budgetary Systems - Activity Based Budgeting (ABB) (10) Feedback and Feed-Forward Control (11) Gathering Quality Information (12) Difficulties of Changing Budgetary Systems (13) Flexible Budgeting (14) Flexe (54 cards)
What is the purpose of Budgetary Control Systems?
Achieve financial control of an entity through PRIME =
(1) Planning
(2) Responsibility
(3) Integration & Coordination
(4) Motivation
(5) Evaluation & Control
What does the ‘P’ in PRIME stand for in Budgetary Control Systems?
PLANNING - Preparing budgets which forces managers to think about the budget period, consider market conditions, and make better long-term decisions.
What does the ‘R’ in PRIME stand for in Budgetary Control Systems?
RESPONSIBILITY - Delegating responsibility by showing managers which revenues and costs they are responsible for.
What does the ‘I’ in PRIME stand for in Budgetary Control Systems?
INTEGRATION & COORDINATION - Leading to better resource utilisation and guiding decisions such as ordering inventory and hiring staff.
What does the ‘M’ in PRIME stand for in Budgetary Control Systems?
MOTIVATION - Giving managers a target in the form of a budget may improve their performance, though overly difficult targets can demotivate them.
What does the ‘E’ in PRIME stand for in Budgetary Control Systems?
EVALUATION & CONTROL - Managers are evaluated by their performance against the budget, and some organizations may give bonuses based on this evaluation.
What is the typical duration of a budget in Long-Term Planning?
A budget typically covers 12 months.
What is the starting point for Long-Term Planning?
START POINT = Mission - strategic objectives of the organisation and how it is to be done.
What are the components of the Performance Hierarchy in Long-Term Planning?
The components are
(1) Mission
(2) Strategic Objectives
(3) Business Unit Objectives.
[1]
What is included in a Mission Statement?
- The reason for the entity’s existence.
- Type of business.
- Policies and standards of behavior.
- Values and culture.
[2]
What are Strategic Objectives?
More concrete and specific goals that state what the organization must do to achieve its mission, such as increasing revenue by 10% each year.
What is a Master Budget?
- Consolidated budget of all the other budgets.
- Goes through approval from the BoD.
What are Functional Budgets?
Budgets for specific business segments like Profit Centre’s and Investment Centre’s, which involve identifying the principal budgeting factor and preparing related budgets.
What is Top-Down Budgeting?
- SENIOR MANAGEMENT prepares the budgets.
- Set departmental targets, which are then given to lower-level managers to meet.
Advantages of Top-Down Budgeting
- 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.
Disadvantages of Top-Down Budgeting
- May not provide enough details.
- May create unrealistic expectations.
- May cause resentment within lower management.
- Less accurate.
How does Top-Down Budgeting link to PRIME?
PLANNING -
RESPONSIBILITY -
INTEGRATION & COORDINATION -
MOTIVATION -
EVALUATION -
What is Bottom-Up Budgeting?
- 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.
Advantages of Bottom-Up Budgeting
- 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.
Disadvantages of Bottom-Up Budgeting
- 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.
How does Bottom-Up Budgeting link to PRIME?
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.
What are Rolling Budgets?
Budgets that are continuously updated by adding another month or quarter to the end of the budgeted period as each month/quarter expires.
Advantages of Rolling Budgets
- 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.
Disadvantages of Rolling Budgets
- 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.
