7. Budgeting (planning)

Question 1

What is a “strategic plan”?

Answer 1

The
strategic plan is a broad set of organizational goals and
the primary approaches for reaching them

Question 2

What are “long-range plans”?

Answer 2

long-range plans for achieving the goals defined in
the strategic plan. This could be up to 5 years or shorter

Question 3

What are “budgets” useful for?

Answer 3

Budgets show how management expects to
obtain and use the resources needed to meet those goals
in the short term, normally one year. It is usually broken
down into monthly budgets and targets.

Question 4

What are the 5 main benefits of a budget?

Answer 4

1. Promote forward thinking and identification of short-term problems
2. Motivate managers to better performance
3. Provide a basis for a system of control
4. Provide a system of authorisation
5. Help coordinate the various sections of the business

Question 5

What is the difference between “forecasting” and “planning”?

Answer 5

• Forecasting is making an estimation
• Planning is committing TOWARDS that estimation

Question 6

What are the budgets studied in this module?

Answer 6

• Sales budget
• Production budget
• Usage budget
• Labour budget
• Purchases budget
• Cash budget

Question 7

What do “cash budgets” do?

Answer 7

Cash Budgets plan for an organization’s cash inflows and outflows.

Question 8

What is an “incremental budget”?

Answer 8

Incremental budget are budgets that are based on what happen in the previous period, with adjustments in factors that are expected to affect the forthcoming budget.

Question 9

What is “Zero-based budgeting” (ZBB)?

Answer 9

ZBB is based on the on the principle that all spending needs to be justified. Therefore, when drawing a budget, it is not automatically accepted that it will be funded in the future simply because it was undertaken this year. The budget will start from zero and will only be increased only if a good case is made to allocate the resources of the business to this form of activity

Question 10

What are problems with “Zero-based bugeting”?

Answer 10

Becomes very complex and difficult to start from scratch every year..

So.. it can be costly to implement
–> Furthermore, employees may feel threatened

Question 11

What are some “criticisms of budgeting”?

Answer 11

• Cannot deal with fast-changing environment
• Focuses on short-term financial targets
• Concentrates power in hands of senior managers
• Takes up lots of management time
• Encourages incremental thinking
• Protects costs rather than lower costs
• Promotes sharp practices among managers

Question 12

What are some behavioural aspects of budgeting?

Answer 12

1. People are the key to success in budgeting
2. Goal divergence vs Goal congruence
3. Motivation is critical
   —–> Allow staff input in budget process
   —–> Provide incentives