8 Budgeting

Question 1

What are six types of budgeting systems?

Answer 1

• Top down vs bottom up budgeting
• Incremental budgeting
• Zero based budgeting
• Rolling budgets
• Activity based budgeting
• Feed-forward control

Question 2

What does imposed style top down budgeting?

Answer 2

Budget allowance set without permitting the ultimate budget holder to have a say.

Question 3

What are the advantages of an imposed style budget?

Answer 3

• Involving managers is time consuming
• Managers may not have the skills or motivation
• Senior managers have a better understanding
• May build budgetary slack or bias into the budget
• Fresh perspective is managers don’t get involved

Question 4

What is a participative budget?

Answer 4

All budget holders are given the opportunity to participate in setting their own budget

Question 5

What advantages are there to participative budgeting?

Answer 5

• managers feel their opinions matter
• more likely to make achievable plans
• lower level managers will have more knowledge

Question 6

What are the 8 reasons for a budget?

Answer 6

• Planning
• Control
• Communication
• Co-ordination towards goal
• Evaluation
• Motivation
• Authorisation
• Delegation

Question 7

Three levels of the performance hierarchy?

Answer 7

Strategic planning, tactical planning, operation planning

Question 8

What is strategic planning?

Answer 8

Strategic planning is long term, looks at the whole organisation and
defines resource requirements

Question 9

What is tactical planning?

Answer 9

Tactical planning is medium term, looks at the department/divisional
level and specifies how to use resources

Question 10

What is operational planning?

Answer 10

Operational planning is very short term, very detailed and is mainly
concerned with control

Question 11

What are hopwoods three management styles?

Answer 11

Budget constrained style
Profit conscious style
Non accounting style

Question 12

What is budget constrained style in terms of performance evaluation?

Answer 12

Manager evaluated on
ability to achieve budget
in the short term

Question 13

What is profit conscious style in terms of performance evaluation?

Answer 13

Manager evaluated on
ability to reduce costs
and increase profit in
the long term

Question 14

What is non-accounting style in terms of performance evaluation?

Answer 14

Manager evaluated 
mainly on non
accounting 
performance indicators 
such as quality and 
customer satisfaction

Question 15

What are the behavioural aspects of budget constrained style?

Answer 15

• Job related pressure
• may result in short term decision making at the expense of long term goals
• Can result in poor working relations with colleagues,
• can result in manipulation of data

Question 16

What are the behavioural aspects of profit conscious style?

Answer 16

• Less job pressure
• better working relations
• Less manipulation of data

Question 17

What are the behavioural aspects of non accounting style?

Answer 17

- Similar to profit 
conscious style but 
there is less concern for 
accounting information
- Requires significant 
and stringent monitoring 
of performance against 
budget

Question 18

What is an expectation budget?

Answer 18

An expectations budget is a budget set at current achievable levels. This is unlikely to motivate managers to improve but may give more accurate forecasts for resource planning, control and performance evaluation.

Question 19

What is an aspirations budget?

Answer 19

An aspirations budget is a budget set at a level which exceeds the level currently achieved. This may motivate managers to improve if it is seen as attainable but may also result in an adverse variance if it is too difficult to achieve

Question 20

What is an imposed budget?

Answer 20

An imposed/topdown budget is ‘a budget allowance which is set without permitting the ultimate budget holder to have the opportunity to participate in the budgeting process

Question 21

What is a participative budget?

Answer 21

Participative/bottom up budgeting is ‘A budgeting system in which all budget holders are given the opportunity to participate in setting their own budget

Question 22

What is an incremental budget?

Answer 22

An incremental budget starts with the previous period’s budget or actual results and adds (or subtracts) an incremental amount to cover inflation and other known changes

Question 23

What are the stages of zero based budgeting?

Answer 23

)Managers should specify, for their responsibility centres, those activities that can be individually evaluated.

(2) Each of the individual activities is then described in a decision package. The decision package should state the costs and revenues expected from the given activity.
(3) Each decision package is evaluated and ranked usually using cost/benefit analysis.(4)The resources are then allocated to the various packages

Question 24

What is a rolling budget?

Answer 24

A budget (usually annual) kept continuously up to date by adding another accounting period (e.g. month or quarter) when the earliest accounting period has expired.

Question 25

What is a rolling budget useful for?

Answer 25

for any area of business that needs tight control

Question 26

What is activity based budget?

Answer 26

, preparing budgets using overhead costs from activity based costing methodology

Question 27

What is feedback control?

Answer 27

‘the measurement of differences between planned outputs and actual outputs achieved, and the modification of subsequent action and/or plans to achieve future required results’

Question 28

What is positive feedback?

Answer 28

Positive feedback is feedback taken to reinforce a deviation from standard. The inputs or processes would not be altered

Question 29

What is negative feedback?

Answer 29

Negative feedback is feedback taken to reverse a deviation from standard. This could be by amending the inputs or process, so that the system reverts to a steady state.

Question 30

How does a feedforward control system operate?

Answer 30

Comparing budgeted results against a forecast.

Question 31

What is control action triggered by?

Answer 31

Differences between budgeted and forecast results

Question 32

What are the six principles of beyond budgeting?

Answer 32

1. Clear principles and boundaries
2. Relative success
3. High degree of freedom
4. Front line teams
5. Relationships
6. Transparent and ethical

Question 33

What are the benefits of beyond budgeting?

Answer 33

1. Faster response time
2. Better innovation
3. Lower costs
4. Improved customer and supplier loyalty