3 Flashcards
What is traditional (incremental) budgeting
Starts with previous year‘s budgets and adds or subtracts amounts depending on output or other factors
Reproduces past inefficiencies
More attention to expenditures than to their purpose
Authorisation of levels of spending
What are the drawbacks of traditional budgeting
Time-consuming and costly
Lacks strategic focus
Doesn’t add value
Inflexible
Focus on cost reduction not value creation
Strengthens vertical command and control
Deters change
What is activity based budgeting
Starts with authorised activities and budgets are only prepared if they’re justified by resources needed to supply those activities
Identifies drivers
Extends conventional budgeting to support activities
Recognises interdependencies
What is the process of activity based budgeting
Estimate sales and production volume
Estimate demand for activities
Determine resources required
Adjust capacity
What is the process of zero-based budgeting
Choose programmes
Identify activities necessary to achieve programmes
Identify resources needed to undertake activities
What is traditional budgeting more or less defined as
Annual, top-down, incremental budgeting process
What is it claimed that organisations gain when using activity based budgeting
Thorough understanding of their business process and cost behaviour which can be used to improve decision-making
What is the claimed advantage that zero-based budgeting has
Moving to allocation of resources by need or benefits and may be strategically focused. 
What do advocates and critics think of activity based and zero based budgeting
Advocates see them as having some advantages over traditional methods but some critics say they need to go further because they may rely on annual processes and still have many of reported drawbacks of traditional budgeting including being more costly and time-consuming
What is beyond budgeting
Idea that companies need to move beyond budgeting because of inherent flaws in budgeting
What range of techniques are argued that could take place of traditional budgeting
Rolling forecasts and market related targets
What is rolling budgeting (rolling forecasts)
Annual budget is broken down by quarters, first quarter is broken down by months
During each quarter, previous quarter is reviewed, re-forecasts are produced for next 4 quarters, monthly budgets are prepared for quarter to come
What are the advantages of rolling budgeting
At any moment, 12 month forecast are available, planning becomes continuous
What are the disadvantages of rolling budgeting
How to measure performance, more time consuming and can create uncertainty
What range of tools and techniques does beyond budgeting use as a replacement for traditional budgeting process
Balance scorecard
Shareholder value models
What do the targets which replace budgets must be aligned with
Rewards and incentives
What is beyond budgeting reawards team success based on
Relative performance, not fixed annual targets
What are reported benefits
The best performers are recognised and rewarded, not just skilled budget negotiators
What are the advantages of beyond budgeting
It’s a more adaptive process than traditional budgeting
It’s a decentralised process, unlike traditional budgeting where leaders plan and control organisations centrally
Claimed more suitable to fast moving modern environment
What do advocates of beyond budgeting mean when using the term budget
Entire performance management process
What are the disadvantages of beyond budgeting
Without a budget, there’s no overall framework of control which allows companies to plan, coordinate and control their activities
There’s a lack of roadmap which details where a business is and where it wants to go
Budgets may be very deeply ingrained in an organisations fabric and operating culture
What are the advantages of computerised budgeting
Spreadsheets can be used to automate some budgeting calculations
Businesses can also use them to find out what happens if parameters change (scenario analysis)
What are the disadvantages of computerised budgeting
Spreadsheets take time and effort and are error prone
Data isn’t transferred automatically to or from accounting systems
They may use convoluted or opaque so users don’t trust output
Categories used by budget holder don’t always correspond exactly with chart of accounts
What do many large and some small businesses use computerised systems for
To do same thing as spreadsheets and systems are integrated with accounting system used by business. These systems produce control reports
