04. Performance Management and Control

Question 1

What are 3 advantages of top-down budgeting?

Answer 1

1. Easily coordinated hence faster - interdependencies of departments will be considered.
2. Better aligns with strategic objectives.
3. No room for budgetary slack.

Question 2

What are two advantages of bottom up budgeting?

Answer 2

1. Motivating to junior managers since they helped to set it.
2. Junior managers have better knowledge of the conditions they face than senior management so targets are more realistic.

Question 3

What are 3 advantages of rolling budgets?

Answer 3

1. Always have a budget for the next 12 months. AIDS in cash flow planning.
2. Motivated managers as budget is realistic since it will be updated to account for changes outside their control.
3. Budget is always updated to reflect external changes. It is therefore more relevant and more valid for comparison against actual performance.

Question 4

What are 3 disadvantages of rolling budgets?

Answer 4

1. Time consuming
2. Budgets may be changed to hide operational inefficiencies
3. Not necessary in a a stable environment

Question 5

Outline incremental budgeting.

Answer 5

Start with previous budget or actual results and then add or subtract incremental accounts to cover inflation or any known change to the business

Good for business with good cost control

Question 6

2 advantages of incremental budgeting

Answer 6

1. Only increment needs to be justified.
2. Easy and quick to be prepared.

Question 7

3 disadvantages of incremental budgeting.

Answer 7

1. Unnecessary costs rain in budget and efficiencies are therefore compounded.
2. Does not encourage a detailed examination of where improvements can be made.
3. Budgeted expenditure is not related to the activities the organisation wishes to perform

Question 8

Outline zero based budgeting.

Answer 8

Overcome incremental budgeting weakness. Managers must plan products and budget is based around those.

Budget starts at zero and each cost will have to be justified

Question 9

3 advantages of ZBB.

Answer 9

1. Should reduce budgetary slack
2. Useful for discretionary spending and support activities such as advertising and R&D where management can choose how much to spend on a particular item.
3. Resources will be allocated to programmes that best achieve org’s objectives.

Question 10

4 Disadvantages of ZBB.

Answer 10

1. Costly and time consuming
2. Not appropriate for non-discretionary expenditure such as costs of production as these depend on quantities of output.
3. Budgetholders, staff and trade unions may feel treated that they have to justify their existence.
4. The ranking and selection of packages may be subjective