B1-budget approaches

Question 1

1. zero-based budgeting process

Answer 1

1. establish activities and objectives
2. establish decision packages
   - decision packages can either be mutually exclusive(different ways of achieving the objective) or incremental (different levels of service to achieve slightly different outcomes)
   - incremental decision packages can then be developed for each option, starting with the base package, which is the minimum level of machinery maintenance.
   - after the base package has been developed incremental packages will then build on this and add additional maintenance time and different activities that should be performed.
3. perform cost/benefit analysis and rank decision packages
4. allocate resources

Question 2

2. usefulness of zero-based budgeting

Answer 2

1. improves resource utilisation as it looks at future needs and challenges the status quo
2. lead to the identification of non-essential costs relating to inefficient operations and their removal from the budget for the forthcoming period
3. allocate funds to the best of the available options based on our decision criteria which could, for example, be based on incremental profit
4. decision packages allow us to create better performance measures, based on the expected costs and benefits
5. much future focused unlike the current system of incremental budgeting which is backward looking and bases next year`s budget on what has happend in the past

Question 3

3. usefulness of zero- based budgeting

Answer 3

1. require high levels of involvement of all levels of our staff since significantly more information would be required to complete our budget
2. help in creating an environment in which change can be more easily accepted by employee in the future
3. encourage managers to question what is currently done and to seek alternatives which are better and lower cost

Question 4

4. limitations of zero-based budgeting

Answer 4

ZBB is potentially costly in terms of using management time and hence this limits its benefits

• variable costs account for a large proportion of our total cost
• discretionary costs, where any expenditure or the amount of the expenditure is at the discretion of management, for example, maintenance, marketing, R&D etc

Question 5

5. explainations of rolling budgeting

Answer 5

• continually updated for the latest plans as time moves on
• when an accounting period ends then another new accounting period is added in (whether this can be a month, quarter or on another basis)

Question 6

6. usefulness of rolling budgeting

Answer 6

1. have a much better idea of what our (cash) position is likely to be and hence can plan accordingly- particularly suited to planning cash folw which needs to be reviewed regularly
2. offer an opportunity for more frequent reviews
   - ensure that both focuses on and considers the prospects further ahead
   - allow the business to react more quickly to a change in the environment than the current annual process allows.
3. accuracy, forcing management to think about the future and by considering the recent changes in the business which results in a more realistic budget would motivate management.

Question 7

7. activity-based budget

Answer 7

• establish the activities and an appropriate cost driver for each activity
• establish the estimated time required per activity
• calculate the budgeted cost driver rate for each activiy, this will be found by multiplying the estimated time required for each activity with the (budgeted)cost of that time
• calculate the overall budget by multiplying the budgeted cost dirver rate with the estimated volumes. this will give an overall staff budget which ban be flexed according to changes in the planned volume of different order types and overall number of items.

Question 8

8. benefits of using activity-based budgeting

Answer 8

1. look in detail at how much time each activity takes, and hence a cost saving can be identified
2. have a much better idea of what we expect our employees to be doing an when they will be active. this can help us with planning and utilising staff more effectively.

Question 9

9. beyongd budgetting

Answer 9

seek to address some of the limitations of traditional budgeting such as it being backward looking and rigid

• rolling forecasts on a monthly or quarterly basis, are used as an alternative to the annual budget.
• the focus is on a wide range of performance measures or key performance indicators(KPIs),such as customer returns and production times.
• involve participation across the business.

Question 10

10. beyond budgeting

Answer 10

1. rolling forecasts:provide more accurate information that reflects the latest estimates on economic trends and customer demand. this would enable our managers to determin strategies that adapt to the fast changing market condition.
2. the focus is on a wide range of performance measures or key performance indicators(KPIs): ensure that our managers strice for continuous improvement rather than being content to meet budget targets.
3. involve participation across the business: motivate our managers by giving clear responsibilities and chanllenges // eliminate dysfunctional behaviour.

Question 11

11. responsibility accounting

Answer 11

the idea of making individual managers responsible for achieving targets.

• manageres are allocated specfic target which they are expected to achieve.
• if there are any difference between actual performance and targeted performance, we would expect the manager responsible to take action to ensure the target is achieved.
• the managers performance should be evaluated only on the areas that they can control. the effect on managers motivation will partly depend on whether they can control the factors that impact on the achievement of the target.
• for the system to be successful, it will also depend on the extent to which the managers are able to influence the setting of the targets.

Question 12

12. budgetary control

Answer 12

compare actual performance against budgeted performance and taking corrective action where nencessary.

• focus on the costs for a department, business unit, product or division.
• responsibility for the sales and costs will be allocated to an individual manager.
• the effect on managers` motivation will partly depend on whether they can control the factors that impact on the achievement of the target.
• in this case, we would need to asses to what extent the individula managers are able to influence the targets.

Question 13

13. controllability

Answer 13

the mangers` performance will have to be evaluated only on the costs that they can control.

• eliminate the uncontrollable items from the areas for which the manager is held accountable
• calculate their effects so that the report distinguishes between controllable and uncontrollable items.

Question 14

14. participation

Answer 14

participation refers to the extent that managers are able to influence the figures that are incorporated into their budgets or targets.

• non-participatory:top-down budget
• participatory:bottom-up budget

Question 15

15. participative budgeting

Answer 15

1. the managers are more likely to accept the targets
2. benefit from local konwledge and get the budget holders to buy in to the budget, enable more effective targets to be set that deal with operational constraints.
3. responsible for their own areas-ensure a sthrong buy-in or ownership of the budget -motivate
4. much more time consuming
5. lack the strategic vision
6. a tendency to build slack into the budget