2. Budgeting Systems And The Behavioural Impacts Of Budgets

Question 1

What is the definition of budget?

Answer 1

A financial and quantitative plan of what an organisation intends to achieve for a forthcoming period.

Question 2

What are the purposes for budgeting?

Answer 2

PRIME

> Planning, look at future and set detailed plans
Responsibility, identify who’s responsible for a achieving targets at each cost centre
Integration, different parts of the business are smoothly integrated
Motivation, setting targets will motivate staff
Evaluation and Control, evaluate the actual results of the business

Question 3

What is the budgeting process?

Answer 3

The admin procedures often used in the budgeting process:
A) establish the budget period (Phasing)
B) Issue the budget manual to the staff who will be involved in setting the budgets. It involves instructions on the budgetary process:
I) the objectives of the budget
ii) organisational structures of the departments
iii) admin details
iv) procedures
C) appoint the budget committee
D) identify the budget coordinator
E) each budget holder will then draw up the budget for their department

Question 4

What is the budget accountant responsible for?

Answer 4

The production and issue of the budget, monitor actual amount spent, prepare reports and analysis

Question 5

What are budgetary accountabilities?

Answer 5

They are senior managers responsible for preparing and providing info to enable the preparation of the organisations budgets

Question 6

What is the budgetary control system?

Answer 6

The cycle of planning and control:
1. Set overall OBJECTIVES
2 . Prepare BUDGETS in line with achieving the stated objectives
3. Business OPERATES during the year
4. COMPARE actual results to the budget

Question 7

What can help targets be an incentive to motivate staff?

Answer 7

> create challenging targets
be achievable
act as effective targets for meaningful reward schemes
focus on items that managers have influence over

Question 8

What are the methods of setting budgets?

Answer 8

• Top-down budgeting
• Bottom-up budgeting
• Negotiated budgeting

Question 9

What are the advantages of top-down budgeting?

Answer 9

• ensure best use of resources
• operational managers may lack required skills
• gives senior managers greater control over budgeting process
• senior managers have a better grasp of the ‘big picture’ and overall corporate objectives

Question 10

What are the disadvantages of top-down budgeting?

Answer 10

• senior managers may lack local knowledge
• targets may be unrealistic or unachievable
• poor use of senior managers time
• de-motivation to staff, may feel they aren’t being listened to

Question 11

What are the advantages of bottom-up budgeting?

Answer 11

• likely to have better local knowledge so set more meaningful budgets
• better understanding of what’s possible
• frees up senior manager time
• more motivation for the staff involved
• gives lower level managers more involvement

Question 12

What are the disadvantages of bottom-up budgeting?

Answer 12

• very time consuming as many managers involved
• operational managers may lack skills
• too many conflicting views
• targets may be too easy for staff deliberately
• lack of consistency though departments

Question 13

What are the types of budgeting system?

Answer 13

• Incremental budgeting
• Zero based budgeting
• Priority based budgeting
• Rolling budgets
• Activity based budgeting

Question 14

What is incremental budgeting?

Answer 14

Budgets calculated by taking current year budget any adjusting for changes

Question 15

What are the advantages for increment budgeting?

Answer 15

> budgets are stable and changes are gradual
simple to work with easier to understand
coordination between department is easier to achieve

Question 16

What are the disadvantages of incremental budgeting?

Answer 16

> business may radically alter what they do between one year and the next
no incentive to reduce costs
encourages department to spend full amounts of budget rather than save money

Question 17

What is zero based budgeting?

Answer 17

Budgets start at zero every year and takes nothing for granted. Managers need to justify every item of expenditure, even if it was approved previously.

Question 18

What are the advantages of zero based budgeting?

Answer 18

> more efficient allocation of resources, eliminates budgetary slack
managers find cost-effective ways to improve operations and identify opportunities for saving money
greater involvement and responsibility for staff

Question 19

What are the disadvantages for zero based budgeting?

Answer 19

> very time-consuming
demotivating, produces less tangible and obvious benefits
more challenging to undertake, may need to train managers
difficult to administer and may affect communication

Question 20

what is is priority based budgeting?

Answer 20

Focuses on organisational priorities and allocates growth and savings.

Question 21

What is priority based budgeting based on?

Answer 21

Ongoing review and requires a statement of:

1. The objectives / purposes of the activity
2. Targets / standards the activity wants to achieve
3. Different levels at which the activity could operate

Question 22

What are rolling budgets?

Answer 22

Amending the budgets each month to account for developing circumstances

Question 23

What are the advantages of rolling budgets?

Answer 23

• more up to date budgetary information
• always considers a lengthy time horizon so no unexpected surprises
• encourages staff to be continually looking at changing variables

Question 24

What are the disadvantages of rolling budgets?

Answer 24

• lots of time and effort needed
• continually changing the budgets can demotivate staff
• it can be unclear which series of budgets we will compare to actuals

Question 25

What is activity based budgeting?

Answer 25

When you identify the activities that actually drive costs and focus the budget around them.

Question 26

What are the advantages of activity based budgeting?

Answer 26

• it focuses managers attention on the true drivers behind costs
• more accurate as consider the whole cost
• more efficient improvement programmes

Question 27

What are the disadvantages of activity based budgeting?

Answer 27

• time consuming and resource intensive

- not easily understood so difficult to gain widespread support and may require considerable investment in training

Question 28

What should the budgetary system encourage?

Answer 28

Honesty and transparency- avoid budgetary slack or a budget that doesn’t promote improvement.
Motivation of the management team - avoid rivalry between departments.
Continuous improvement - improve performance beyond the budget and improve efficiencies and growth.
Goal congeal - decisions are made in the best interests of the whole organisation.
Reduce rivalry and suboptimal performance - encourage team working, sharing of resources and best practice.