1.4 Budgeting Flashcards
What is budgeting
Method of allocating/controlling resources in an organisation and using a common monetary measure
Functions of budgets
Motivation - set targets to motivate employees
Co-ordinate and communicate
Evaluation - performance of managers
Plan & allocate resources
Control - what managers do
Conflicts of budgets
Planning & motivation- planning targets that are not too low but not too high that they are unachievable can cause adverse motivational effects
What is incremental budgeting
Pros and cons
Uses current year as a base with incremental change, it’s ok if current procedures are effective and efficient
Pros
Simple process
Well understood
Cheap
Cons Not subject to scrutiny Can lead to budgeting slack of mangers Doesn’t encourage innovative thinking Can miss align areas
Zero based budgeting
Pros and cons
Method in which all expenses must be justified for each new period
Pros Full review of all items Justification for all activities Adaptive approach to changing circumstances Can lead to better resource allocation
Cons
Time consuming / expensive
Managers may not have the skills required
Managers may feel threatened
Activity based budgeting
Pros and cons
Used in conjunction with ABC
Activity levels and cost drivers used to develop the budget
Defines activities which underlie financial resources and determines who’s responsible for them
Pros
Allocates resources effectively
Enables focus on overhead and support cost
Cons
Time consuming n costly
Costing system need to match (ABC)
Rolling budget
Continually updated to add a new budget period once most recent budget period is complete so always has a budget that extends one month into the future
Pros
Keeps managers motivated
Useful in difficult to predict circumstances
Cons
Time consuming
Managers may not see value
Critisims of budgeting
Can create short term focus
Encourages rigid planning & incremental thinking
Focuses on achieving budget
Top Down budgeting
Minimum consultation between senior and lower level managers
Pros
Facilitates the setting of demanding targets for managers and the business
More direct transmission of plans as they come direct from seniors
Cons
Can lower motivation
Targets may be irrelevant due to distance from the coal face of those who set budgets
Bottom up budget
Lower level managers encouraged to develop their own budgets & help set organisational priorities. These feed upwards
Pros
Increased motivation to achieve targets as they have been involved in making them
Organisation uses its knowledge base to develop the budget
Increases communication in organisation
Cons
Time consuming
Game playing, undemanding target set to make managers look better
Negotiated budget
Senior management sets guidelines
Lower level managers agree budget
Draft budgets reviewed by seniors
Dysfunctional behaviours budgeting
Gaming
Illegal acts
Focusing on positive aspects
Filtering- data is filtered so only desirable aspects are reported
