6. Budgets: Control and Performance Flashcards
What is incremental budgeting?
Taking the current period and adding on an amount for anticipated inflation and growth
What are the advantages of incremental budgeting?
- Stable and change is gradual
- Simple and easy to understand
- Easy co-ordination
What are the disadvantages of incremental budgeting?
- Assumes activities will continue in the same way
- Budget can become out of date
- Budgetary slack is never reviewed
What is a rolling budget?
Every new budget extends the current budget by another period
What are the advantages of a rolling budget?
- Limit uncertainty as they are updated quickly
- Forced to regularly reassess assumptions
- Decisions based on a plan produced recently
What are the disadvantages of a rolling budget?
- Large time and expenses
2. Benefits limited if assumptions don’t change much
What are the attributes of zero based budgeting?
- Starts at nil every period
- Establish every item as a decision package
- Justify each decision package individually, and review/rank based on benefits
- Allocate resources based on the ranking
What are the advantages of zero based budgeting?
- Efficient allocation of resources
- Increased staff motivation
- Identifies and eliminates wastage
What are the disadvantages of zero based budgeting?
- Difficult to define decision packages
- Time consuming
- Difficult for R&D to justify expenditure
- Lots of training needed
- Difficult to administer and communicate
What is activity based budgeting?
A method of budgeting based on an activity framework and utilising cost driver data in the budget setting and variance feedback process
What are the advantages of activity based budgeting?
- Focuses on true drivers behind costs
2. Enables more efficient improvement programmes
What are the disadvantages of activity based budgeting?
- Time consuming and resource intensive
2. Not readily understood
What are the 5 budgeting challenges faced by multinational companies?
- Home currency budget targets may fluctuate in other currencies due to exchange rates
- Performance results affected by exchange rates
- Local regulations and political restrictions affect decisions in different countries
- Difference in customer preferences incurs additional costs of adaptation
- Different local competitive environments
What is a controllable cost?
A cost which is controlled, typically by a cost, profit or investment centre manager
What is feedback control?
Actual results are compared to budgets/forecasts and relevant action is taken
What are the two types of feedback that come from variance analysis?
- Negative feedback (i.e. correct substandard performance)
2. Positive feedback (i.e. revise future targets/standards)
What is feed-forward control?
The forecasting of differences between forecast and planned/budgeted outcomes, and the implementation of action, before the event, to avoid such differences
What are the 6 important elements of an effective control budget?
- Targets are achievable but stretching
- Clearly defined management responsibilities
- Reliable and timely information systems and budget reports
- Reports produced for individual managers
- Short reporting periods
- Effective feedback control
What is what if/sensitivity analysis?
Changing the variables within your analysis to see what impact it has on results
What are the aspects of budgeting that are important for staff motivation?
- Challenging targets
- Realistic, achievable targets
- Use targets for reward schemes
- Participative budget processes
What are the 7 advantages of top down budgets?
- Considers corporate strategy
- Considers overall resource allocation
- Time efficient
- Co-ordination of plans and objectives
- More objective perspective
- Less budgetary slack can be built in
- No concern of inexperienced staff
What are the 5 disadvantages of top down budgets?
- Lack of knowledge of operations
- Staff not committed to budgets
- Low staff motivation
- More central/senior management time required
- No communication between departments
What are the 4 unethical behaviours that can arise in bottom up budgeting?
- Budgetary slack
- Producing unrealistic budgets to make budget holders look good
- Short term focus
- Personal goals influence decisions
What are the 3 unethical behaviours that can arise in top down budgeting?
- Excessive pressure from the top
- Misleading budget holders, leading to demotivation
- Passing budget holders responsibility for costs they do not control
