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4. Rationale for budgets Flashcards

1
Q

Define Budget and its difference to forecast

A

Quantified plan of action for accounting period

  • Target and aim for period whereas forecast is an estimate of what’s likely to occur
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2
Q

PRIME

A

P: Planning - forcing management to plan

R: Responsibility - split up accountability

I: Integration and co-ordination - between departments

M: Motivate - to improve performance

E: Evaluation and control - compare actual performance to target

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3
Q

What is meant by the conflicting purposes of budgeting

A

Conflic in motivation and evaluation and control
eg. to motivate budgets should be challenging

which is not useful for evaluation and control

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4
Q

What are the steps in planning

A
  • Determine objectives
  • Plan: set budget
  • Operate in line with objectives
  • Control: compare actual to budget
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5
Q

Define planning according to CIMA

A

Establishment of objectives, formulation evaluation and seleciton of pollicies and tactics to achieve them

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6
Q

What are the types of planning

A
  • Strategic planning: long term beyond budget period
  • Budgetary/tactical planning: generally a year with detailed plans
  • Operational planning: short term day to day basis of usage of resources
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7
Q

Define budget period

A

The period for whicha. budget is prepared and used -sub divided into control periods

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8
Q

What are the advantages of implementing budgets

A
  • Forces organisation to plan
  • Allocates responsibility
  • Encourages cordination and integration
  • Can motivate
  • Provides targets to evaluate performance
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9
Q

What are the disadvantages of implementing budgets

A
  • Can result in plan fixation and loss of flexibility
  • Takes management time and costs
  • Can be demotivating
  • Variance analysis does not provide solutions
  • Encourages spending of budget allowance to protect future periods
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10
Q

Which external factors can impact usefullness of budgets

A

-P: Political impact on sales
- Economic: currency fluctuations and exchange rates
- L: legal: taxes, employment regulations etc

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11
Q

Define Incremental budgeting

A

Where budget is based on the current years budget plus an extra amount for estimated growth or inflation

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12
Q

What are the advatages of incremental budgeting

A
  • Simple and cheap
  • Relatively quick to adminster
  • Has proof of concept
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13
Q

What are the disadvantages of incremental budgeting

A
  • Does nto identify inefficiencies
  • Budgetary slack: deliberately overestimating costs or under estimating revenues
  • Not suitable for changing environments
  • Encourages managers to spend up to budget
  • Does not produce challenging performance targets
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14
Q

Define Zero Based budgeting

A

Method of budgeting that requires each cost eleement to be specifically justified - as if undertaken for the first time
- To reduce waste and allocate resources more efficiently

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15
Q

What are intended activity referred to in zero based budgeting

A

Decision packages

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16
Q

What are the two types of decision packages

A

Mutally exclusive: contain alternative methods to getting same job done

Incremental packages: which divide one aspect of activity into different levels of effort

17
Q

What is the three step approach to decision packages in zero based budgeting

A

Step 1: define the decision package (mutally exclusive or incremental package)

Step 2: Evaluate and rank activity

Step 3: Allocate resources

18
Q

What are the advantages of Zero based budgeting

A
  • Possible to identify an dremove inefficient or obsolete operations
  • Requires close examination
  • Results in more efficient allocation and challenges status quo
  • Responds to cahnges in environment
  • Good for short term
19
Q

What are disadvantages of zero based accounting

A
  • Lot of extra work
  • Short term benefits will be emphasises
  • makes impression that all decisions have to be made in the budget
  • requires for management skills to create decision packages
  • ranking process cna be difficult
20
Q

Which scenarios willl ZBB work best and worst

A
  • Does not work well for direct manufacturing costs
  • Does work well in support expenses
  • Does work well in service industries and not for profit organisations
21
Q

What is a Rolling budget

A

Budget is continously updated by adding further accounting period
- Beneficial for periods of uncertainty
- Shorter periods between preparing budgets

22
Q

What are the advantages of rolling budgets

A
  • Uncertainty is reduced
  • More realistic budgets
  • Planning and control will be based on more recent plan
  • Continuos and encourages planning horizon
23
Q

What are disadvantages of rollinng budgets

A
  • Effort and expense
  • May demotivate managers due to regular revision
  • More costs due to adminstration expense
24
Q

What is activity based budgeting

A

Uses the costs determined using activity based costing as a basis for preparing budgets

25
Q

What considerations does activty based budgeting have

A
  • Realises that activities drive costs
  • Drivers of cost should be controlled
  • Not all activities add value
  • Demand and decisions beyond managers drive may drive activity
26
Q

What is meant by beyond budgeting

A

Two fundamental concepts:
- Adaptive management process instead of rigid annual budget
- Move towards developed networks rather than centralised hierarchies

27
Q

What is meant by adaptive management in beyond budgeting

A
  • Rolling budgets: plan on rolling basis focus on cash forecasting rather than cost control
  • Resource allocation: budget based on up to date information
  • Focus on external factors
  • Wide range of performance measures: financial and non financial KPIs
28
Q

What is meant by devolved networks rather than centralised hierarchies in beyond budget

A
  • Personal responsibility: culture of responsbility and delegating decisions to managers
  • Detailed knowlegde: people with detailed knowledge of business should be involved in preparing budgets
29
Q

What are advantages of beyond budgeting

A
  • Encourages adaptability/innovation
  • Increases motivation through personal responsibility
  • More up to date information
  • Improves resource allcoation
  • impproves performance measurement
30
Q

What are the disadvantages of beyond budgeting

A
  • May be resistance to change from employees to adopt culture
  • Need to plan even if there are lots of uncertainties

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