Chapter 10: Budgeting

Question 1

What purpose of a budget is described below?

A budgeting process forces a business to look to the future. This is essential for survival since it stops management from relying on ad hoc or poorly co-ordinated planning.

Answer 1

Planning

Question 2

What purpose of a budget is described below?

Actual results are compared against the budget and action is taken as appropriate.

Answer 2

Control

Question 3

What purpose of a budget is described below?

The budget is a formal communication channel that allows junior and senior managers to converse.

Answer 3

Communication

Question 4

What purpose of a budget is described below?

The budget allows co-ordination of all parts of the business towards a common corporate goal.

Answer 4

Co-ordination

Question 5

What purpose of a budget is described below?

Responsibility accounting divides the organisation into budget centres, each of which has a manager responsible for its performance. The budget may be used to evaluate the actions of a manager within the business in terms of the costs and revenues over which they have control.

Answer 5

Evaluation

Question 6

What purpose of a budget is described below?

The budget may be used as a target for managers to aim for. Reward should be given for operating within or under budgeted levels of expenditure. This acts as a motivator for managers.

Answer 6

Motivation

Question 7

What purpose of a budget is described below?

The budget acts as a formal method of authorisation to a manager for expenditure, hiring staff and the pursuit of plans contained within the budget.

Answer 7

Authorisation

Question 8

What purpose of a budget is described below?

Managers may be involved in setting the budget. Extra responsibility may motivate the managers. Management involvement may also result in more realistic targets.

Answer 8

Delegation

Question 9

What is a quantitative plan prepared for a specific time period. It is normally expressed in financial terms and prepared for one year.

Answer 9

Budget

Question 10

A robust business plan/budget can often result in anticipating and avoiding what?

Answer 10

Disastrous outcomes

Question 11

Without a budget, an organisation will be highly…

Answer 11

Inefficient and ineffective.

Question 12

What kind of planning is long term, looks at the whole organisation and defines resource requirements.

Answer 12

Strategic

Question 13

What kind of planning is medium term, looks at the department/divisional level and specifies how to use resources.

Answer 13

Tactical

Question 14

What kind of planning is very short term, very detailed and is mainly concerned with control.

Answer 14

Operational

Question 15

Budgets are necessary to convince banks and other lenders to do what?

Answer 15

Extend credit

Question 16

What are Hopwood’s three management styles?

Answer 16

• Budget constrained style
• Profit conscious style
• Non-accounting style

Question 17

Which of Hopwoods three management styles performance are evaluated on the below?

• Manager evaluated on ability to achieve budget in the short term
• Manager will be criticised for poor results. For example, if spending exceeds the limit set

Answer 17

Budget constrained style

Question 18

Which of Hopwoods three management styles performance are evaluated on the below?

• Manager evaluated on ability to reduce costs and increase profit in the long term
• For example, a manager will be prepared to exceed the budgetary limit in the short term if this will result in an increase in long term profit

Answer 18

Profit conscious style

Question 19

Which of Hopwoods three management styles performance are evaluated on the below?

-Manager evaluated mainly on non-accounting performance indicators such as quality and customer satisfaction

Answer 19

Non-accounting style

Question 20

Which of Hopwoods three management styles has the behavioral aspects below?

• Job related pressure
• May result in short-term decision making at the expense of long term goals Can result in poor working relations with colleagues

Answer 20

Budget constrained style

Question 21

Which of Hopwoods three management styles has the behavioral aspects below?

• Less job related pressure
• Better working relations with colleagues
• Less manipulation of data

Answer 21

Profit conscious style

Question 22

Which of Hopwoods three management styles has the behavioral aspects below?

• Similar to profit conscious style but there is less concern for accounting information
• Requires significant and stringent monitoring of performance against budget

Answer 22

Non-accounting style

Question 23

What is a budget set at current achievable levels.

Answer 23

An expectations budget

Question 24

What is a budget set at a level which exceeds the level currently achieved.

Answer 24

An aspirations budget

Question 25

What type of budget is unlikely to motivate managers to improve but may give more accurate forecasts for resource planning, control and performance evaluation.

Answer 25

An expectations budget

Question 26

What type of budget may motivate managers to improve if it is seen as attainable but may also result in an adverse variance if it is too difficult to achieve. This must be managed carefully.

Answer 26

An aspirations budget

Question 27

A top down budget is also known as...

Answer 27

An imposed budget

Question 28

A bottom up budget is also known as...

Answer 28

A participatory budget

Question 29

What kind of budget is a budget allowance which is set without permitting the ultimate budget holder to have the opportunity to participate in the budgeting process

Answer 29

An imposed budget

Question 30

What kind of budget is a budgeting system in which all budget holders are given the opportunity to participate in setting their own budgets'

Answer 30

A participatory budget

Question 31

What type of budget starts with the previous period’s budget or actual results and adds (or subtracts) an incremental amount to cover inflation and other known changes. It is suitable for stable businesses, where costs are not expected to change significantly. There should be good cost control and limited discretionary costs.

Answer 31

Incremental budget

Question 32

What are the two advantages of the incremental budget?

Answer 32

- Quickest and easiest method. | - Suitable if the organisation is stable.

Question 33

What are the three disadvantages of the incremental budget?

Answer 33

- Builds in previous problems and inefficiencies. - Uneconomic activities may be continued. - Managers may spend unnecessarily to use up their budgeted expenditure allowance this year, thus ensuring they get the same (or a larger) budget next year.

Question 34

What type of budget is a ‘method of budgeting that requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time.

Answer 34

Zero-based budget

Question 35

What are the five advantages of the Zero-based budget?

Answer 35

- Inefficient or obsolete operations can be identified and discontinued - Increased staff involvement at all levels - Responds to changes in the business environment - Knowledge and understanding of the cost behaviour patterns of the organisation will be enhanced - Resources allocated efficiently and economically

Question 36

What are the five disadvantages of the Zero-based budget?

Answer 36

- Short-term benefits to the detriment of long-term goals - The budgeting process may become too rigid - The management skills required may not be present - Managers may feel demotivated - Ranking can be difficult for different types of activities or where the benefits are qualitative in nature

Question 37

What kind of buget is kept continuously up to date by adding another accounting period (e.g. month or quarter) when the earliest accounting period has expired. The remaining budget is re-forecast, as well as the new period being added.

Answer 37

Rolling budget

Question 38

Rolling budgets are suitably for a fast moving environment where what cannot be made?

Answer 38

Accurate forecasts.

Question 39

What are the five advantages of the Rolling budget?

Answer 39

- Planning and control will be based on a more accurate budget - Rolling budgets reduce the element of uncertainty - There is always a budget that extends into the future - It forces management to reassess the budget regularly and to produce budgets which are more up to date

Question 40

What are the six disadvantages of the Rolling budget?

Answer 40

- Rolling budgets are more costly and time consuming than incremental budgets - May demotivate employees if they feel that they spend a large proportion of their time budgeting or if they feel that the budgetary targets are constantly changing - There is a danger that the budget may become the last budget 'plus or minus a bit' - An increase in budgeting work may lead to less control of the actual results - Issues with version control, as each month the full year numbers will change - Confusion in meetings as to each numbers the business is working towards; this can distract from the key issues. as managers discuss which numbers to achieve

Question 41

What budget is defined as: ‘a method of budgeting based on an activity framework and utilising cost driver data in the budget-setting and variance feedback processes’

Answer 41

Activity based budget

Question 42

What are the three advantages of ABB?

Answer 42

- It draws attention to the costs of ‘overhead activities’ which can be a large proportion of total operating costs. - It recognises that it is activities which drive costs. If we can control the causes (drivers) of costs, then costs should be better managed and understood. - ABB can provide useful information in a total quality management (TQM) environment, by relating the cost of an activity to the level of service provided.

Question 43

What are the three disadvantages of ABB?

Answer 43

- A considerable amount of time and effort might be needed to establish the key activities and their cost drivers. - It may be difficult to identify clear individual responsibilities for activities. - It could be argued that in the short-term many overhead costs are not controllable and do not vary directly with changes in the volume of activity for the cost driver. The only cost variances to report would be fixed overhead expenditure variances for each activity.

Question 44

What is feedback taken to reinforce a deviation from standard. The inputs or processes would not be altered.

Answer 44

Positive feedback

Question 45

What is feedback taken to reverse a deviation from standard. This could be by amending the inputs or process, so that the system reverts to a steady state. For example, a machine may need to be reset over time to its original settings.

Answer 45

Negative feedback

Question 46

What are the four general benefits of Beyond Budgeting?

Answer 46

- Faster response times - Better innovation - Lower costs - Improved customer and supplier loyalty