6 Budgeting

Question 1

What is a budget?

Answer 1

This is a quantitative expression of a plan for a defined for a period of time. May include planned sales volumes and revenues; resource quantities, costs and expenses; assets, liabilities and cash flows

Question 2

What is the acronym for the benefits which budgeting brings?

Answer 2

Control - a budget that helps to control organisation as it forces it to plan
Responsibility - who is responsible for what
Integration - help communication and co-ordination
Motivation - motivate staff
Evaluation - allow evaluation of actual results

Question 3

What do functional budgets lead onto?

Answer 3

The production of the Master Budget

Question 4

What is the principal budget factor?

Answer 4

This is often the starting point in the budget setting process. Often will be sales demand but it could be production capacity or material supply. Limits what organisation can achieve - most often sales. (look at diagram on page 44)

Question 5

What is a cash budget?

Answer 5

This is a detailed budget of estimated cash inflows and outflows incorporating both revenue and capital items

Question 6

What do you do if you identify a potential shortage in your cash flow?

Answer 6

• Organise an overdraft
• Offer customer a discount to pay early
• Delay paying suppliers
• Raise other finance

Question 7

What do you do if you identify a potential surplus in your cash flow?

Answer 7

• Offer more generous terms to your customers
• Arrange to pay off some finance e.g. loans
• Organise to put surplus on deposit on the money markets etc

Question 8

What are capital expenditure budgets?

Answer 8

This is the purchase of new buildings or new plant and machinery. It can often have a significant impact on cash flow and profitability.

Question 9

What is a budget committee?

Answer 9

co-ordinates the preparation and admin of budgets

Question 10

What is a budget period?

Answer 10

the time period for which a budget is prepared

Question 11

What is a budget manual?

Answer 11

a booklet containing the instructions in relation to the budgeting process

Question 12

What is budgetary slack?

Answer 12

Managers try to overestimate expenses or underestimate revenues in their budgets to ensure that they meet their targets

Question 13

What is a periodic budget?

Answer 13

This is a budget which shows the costs and revenue for one period of time and is updated for each period

Question 14

What is a rolling budget?

Answer 14

This is a budget which is established at a beginning of a period, and is then constantly amended and extended

Question 15

What are the positives and negatives of a rolling budget?

Answer 15

Positives:

1. At times of uncertainty, providing regular revisions to the budget will => better info and decision making
2. Encourages staff to constantly look at internal and external variables

Negatives:

1. Involves much time and effort
2. Concept is not as readily understood by managers within an org
3. Continually changing the goalposts => demotivation

Question 16

What are incremental budgets?

Answer 16

Where the budget for the forthcoming period is calculated by taking the current budget or actual results and adjusting for changes e.g. inflation and growth.

Question 17

What are the uses and problems with incremental budgets?

Answer 17

Uses:

1. Stable and change is gradual
2. Can operate depts on a consistent basis
3. Relatively simple and quick to operate
4. Conflicts avoided if treated similarly
5. Impact of change can be seen quickly

Problems

1. Assumes activities will continue the same way
2. No incentive for developing new ideas
3. No incentive to reduce costs
4. Priority for resources may have changed since the budgets were set originally
5. May be budgetary slack built into the budget

Question 18

What are zero-based budgets?

Answer 18

This is where managers are required to justify every item of expenditure even if that item had been accepted in previous periods

Question 19

What are the uses and problems with zero-based budgets?

Answer 19

Uses:

1. Very responsive to changes
2. Result in efficient in allocation of resources
3. Drive managers to find our cost effective ways to improve operations
4. Detect inflated budgets
5. Increase communication and co-ordination

Problems:

1. Difficult to define decision units and packages - time consuming
2. Difficult to rank decision units
3. Some departments may find it more difficult to justify expenditure as some outcomes are not short term
4. Necessary to train managers
5. May prevent managers reacting to changed circumstances once the budget has been set

Question 20

What is a top down budget (imposed budget)?

Answer 20

This is where a budget is set by starting with the overall corporate objectives set by senior management and then working down through the different levels of the organisation, setting appropriate targets

Question 21

What is bottom-up budget (participative budget)?

Answer 21

This is the reverse of top-down - budget set with the individual personal and departmental objectives

Question 22

What are the advantages of bottom up budgeting?

Answer 22

1. Set by those closer to the action so more informed
2. Staff take ownership of the budgets
3. Greater staff participation => greater motivation
4. Doesn’t take up much senior management time
5. Encourages communication between depts.`
   (also disads for top-down budgets)

Question 23

What are the disadvantages of bottom up budgeting?

Answer 23

1. More scope for non-goal-congruent behaviour
2. More scope for disagreement between staff
3. Lack of overall confidence
4. More time consuming and costly
5. Budgetary slack may be built in
6. Inaccurate