Semester 2: Lecture 6: Critical examination of budgeting.

Question 1

Brief criticisms of budgets:

Answer 1

• Cannot deal with rapid change
• Protect rather than lower costs.
• Focuses on short term/incremental thinking
• Based around traditional business functions (do not overlap)

Question 2

Behavioural considerations within the budgeting process:

Answer 2

• Not a neutral process
• May demotivate some functional managers.
• May lead to a lack of goal congruence.

Question 3

5 criteria which can be classed as ‘good’ budgeting systems:

Answer 3

• Consultation.
• Realistic targets.
• Education and training.
• Involvement and participation.
• Not used for disciplinary action.

Question 4

Problems with tradition incremental budgeting:

Answer 4

• Uses lasts years figures and adjusts without reconsidering if costs are necessary.
• May perpetuate existing inefficiencies.
• Discourage innovation?
• Reduce flexibility
• Result in missed opportunities.

Question 5

3 alternatives to traditional incremental budgeting:

Answer 5

1) Rolling Budget

2) Activity Based Budgeting

3) Zero Based budgeting.

Question 6

What is a rolling budget?

Answer 6

• Budget is divided into quarters.
• At the end of each control period a comparison is made between actual results and the budget forecasts.
• Based on this budgets for the rest of the period will be reviewed/revised if necessary.
• The entire budget will be extended for a further control period.

Question 7

Pros and Cons of a rolling budget?

Answer 7

+

More accurate budgets for future periods.
Reduce uncertainty
Always a budget for the next period
Encourages management to review/revise.

-
Time consuming/costly
May be demotivating if targets change too much
Version control is an issue

Question 8

What is activity based budgeting?

Answer 8

• Should only be used if a firm uses ABC costing.
• Based upon the idea that costs are driven by activities within the organisation. (those activities add value to product/service)
• Popular in public-sector organisations such as law enforcement and healthcare.

Question 9

What is zero based budgeting?

Answer 9

• Starts the budget on fresh terms rather than basing off previous figures.

-Every activity is questioned and has to be justified.

• Encourages forward thinking in terms of the resources needed
• Can result in changes in cost structures and increase efficiency and competitiveness

Question 10

What is Beyond Budgeting?

Answer 10

• Target setting process is based on the agreement of external benchmarks.
• Greater inclusion/ less bureaucracy.
• Motivation through delegating responsibility to operational managers.