Lecture 11: Budgeting 2 Flashcards
(21 cards)
what are teh six behaviourial aspects of budgeting?
1) Motivation
2) Participation
3) Feedback
4) Group Effects
5) Budget slack
6) Politics of the organisation
hwo does a budget cuase motivation?
Budget provides formal financial targets-> Measure performance against these targets -> motivation (ideally!)
Difficult but attainable -> challenge -> motivation
Some people respond to targets, some don’t based on personality
what is the Participation aspect of budgeting?
Psychology studies show that individuals have ‘needs’:
Sense of belonging
Self esteem
Personal fulfilment
Meeting these needs is helped by taking part in the budgetary process:
Ownership of that process
Responsibility for the budgets set
what is the feedback part of the budgetary process?
Feedback:
Must be provided in a timely manner i.e. as soon as possible
Must be relevant to the responsibility level held by the individual in the organisation
Positive feedback is always welcome
Negative feedback is not welcome: Rejection, Demotivating, Helps to present negative feedback in a constructive way
Different personalities react in different ways to the same feedback
what are group effects in budgeting?
If a group in an organisation is cohesive and sees the budgetary goals as being targets for the whole group, the individuals in that group will be much more likely to participate in trying to reach those targets.
what is budget slcack?
Managers setting the budgets may be tempted to build in some ‘slack’ i.e. some spare resources, so that their budget targets are easier to achieve.
what are the cons of budget slack and how is it counetred?
If some managers include slack and others don’t:
It creates inequity — managers without slack are penalised under stricter scrutiny.
It undermines the fairness and accuracy of performance evaluation.
Countermeasures:
Senior management should set stricter, standardised targets.
Ensure specific, transparent input at the budget-setting stage.
Use a budget revision process to identify and eliminate slack post-hoc.
What is incremental budgeting, and when is it appropriate or inappropriate to use?
Incremental budgeting is a traditional budgeting method where the current year’s budget is based on the previous year’s figures, adjusted for known changes.
✅ Works well for unit-level activity costs, where resource use scales directly with output (e.g. raw materials, direct labour).
❌ Inappropriate for indirect/support activities like ordering, scheduling, or processing, which don’t have a clear input-output relationship.
These costs often require activity-based or zero-based budgeting to manage effectively.
What are the Limitations of traditional Budgeting?
Limitations of traditional Budgeting:
Invites ‘gaming the system
Inflexible (e.g fixed budgets)
Top-down
Indirect connection with company strategy
Poor indicator of performance
What is Activity-Based Budgeting (ABB), and how does it differ from Activity-Based Costing (ABC)?
Activity-Based Budgeting (ABB) is used to manage costs more effectively by starting with cost objects (e.g. products/services). It estimates the activities needed to meet budgeted output, then authorises only the resources required for those activities.
In contrast, Activity-Based Costing (ABC) starts with resources, allocates them to activities, and uses cost drivers to assign costs to cost objects.
➤ ABB = cost object → activities → resources
➤ ABC = resources → activities → cost object
what are the 5 Stages (process) in Activity-based budgeting?
Stages (process) in Activity-based budgeting:
1) Estimate the production and sales volume by individual products and customers
2) Estimate the demand for organisational activities
3) Determine the resources that are required to perform organisational activities
4) Estimate for each resource the quantity that must be supplied to meet the demand
5) Take action to adjust the capacity of resources to match the projected supply
what is another name for Zero-based budgeting (ZBB)?
Zero-based budgeting (ZBB) is also know as priority- based budgeting.
what is zero based budgeting?
ZBB requires that projected expenditure for existing activities should start from base zero rather than last year’s budget. Managers are required to justify all budgeted expenditures rather than just the changes from previous year.
ZBB focuses on programmes or activities (e.g improvement of healthcare and nursing facilities for senior citizens) instead of functional departments based on line items as the case with traditional budgeting.
What is zero based budgeting best for?
ZBB is best suited to discretionary costs (advertising, research and development, training) and support activities. With discretionary costs, management has some discretion as to the amount it will budget for a particular activity.
With discretionary costs, there is no optimum relationship between inputs (as measured by costs) and outputs (measures by revenue or some other object function) for these costs. Discretionary costs are not predetermined by some previous commitment.
what are the Stages in Zero-based budgeting?
Stages in Zero-based budgeting:
1) A description of each organizational activity in a decision package
2) The evaluation and ranking of decision packages in order of priority (review process- how much to spend and where to spend it)
3) Allocation of resources based on order of priority up to the spending cut- off level (package ranked in order of decreasing benefits)
What are the four main benefits of Zero-Based Budgeting (ZBB)?
benefits of Zero-Based Budgeting (ZBB):
No automatic carryovers — spending must be justified from zero, not based on last year’s figures
Encourages a questioning mindset — avoids waste from “we’ve always done it this way”
Focuses on value for money — aligns spending with actual needs and benefits
Makes managers justify all costs, including intangible outputs
🧠 ZBB = funding by need, not habit
What are the cons of traditional budgeting?
cons of traditional budgeting:
⏳ Time-consuming and 👥 expensive in staff time
📉 Focuses too much on short-term financials, ignoring key drivers of shareholder value (e.g. innovation, market growth)
🎯 Fixed targets and incentives can lead to:
“Hit the bonus at all costs” behaviour
Wasteful “spend what’s in the budget” mindset
Risk aversion, even when taking risks may help long-term success
can be risky if budgets are based on uncertain forecasts
Often based on only the lowest targets rather than attempting to beat the targets
Encourages spending what is in the budget even if this is not necessary in order to guard against next year’s budget being reduced
Focus on achieving the budget even if this results in undesirable actions
What is Beyond Budgeting and what are its key principles?
Beyond Budgeting is a flexible alternative to traditional budgeting. It aims to replace rigid financial plans with adaptive, decentralised management.
🔑 Key principles:
Adaptability – real-time performance tracking, not fixed forecasts
Decentralisation – empowers frontline managers to make financial decisions
Relative performance – evaluates using benchmarks, not fixed targets
🧠 Designed for dynamic, fast-changing environments.
What are the key advantages of Beyond Budgeting?
key advantages of Beyond Budgeting:
Increased Flexibility – Enables quick adaptation to market changes without rigid annual budget constraints
Empowered Staff – Boosts motivation and accountability by pushing decision-making to the front line
Reduced Bureaucracy – Cuts admin burden by eliminating detailed, time-consuming budget processes
🧠 Designed for speed, autonomy, and responsiveness.
What are the key challenges of implementing Beyond Budgeting?
Cultural Shift Required – Demands a major change in mindset towards trust and decentralised empowerment
Complex Transition – Switching from traditional budgeting to Beyond Budgeting can be difficult and disruptive
🧠 Big gains, but not without growing pains.
How does Beyond Budgeting differ from Traditional Budgeting?
Traditional Budgeting
Fixed annual targets & incentives
Variance control & static plans
Central control & coordination
Pre-allocated resources
Focus on managing numbers
🔸 Beyond Budgeting
Stretch goals & relative rewards
Continuous planning & KPIs
Local control & dynamic coordination
Resources on demand
Focus on value creation
