Budgetary Control Systems

Question 1

What is a budget?

Answer 1

A budget is a formalised, numerical plan of action for an organisation that represents what it aims to achieve in the forthcoming period.

Question 2

What is the purpose of a budget?

Answer 2

• Planning
• Authorisation
• Motivation
• Cost control
• Co-ordination

Question 3

Explain planning within budgeting.

Answer 3

A budget is a plan that allows an organisation to see its forthcoming costs and revenues, enabling it to prepare for the future.

Question 4

Explain authorisation within budgeting.

Answer 4

Agreeing a budget gives responsibility to a departments manager to meet the budget, by incurring costs to the expected budget and where necessary, achieve expected income. The responsibility allows the manger to offer work incentives to staff to perform to hit targets.

Question 5

Explain motivation within budgeting.

Answer 5

By comparing performance between budget and expected staff are motivated if they are hitting targets. Budgets are good to evaluate performance.

Question 6

Explain costs control within budgeting.

Answer 6

Actual financial results can be compared to budgeted to measure and organisations performance. Variances can be investigated and actions can be taken to improve performance, this allows management to control the organization.

Question 7

Explain co-ordination within budgeting.

Answer 7

Each function of the organisation will have individual aims but these aims must fit with the overall aims of the organization. With the use of co-ordination between departments this ensures the successful delivery of the end product or service. This is called goal congruence.

Question 8

What is a strategic plan and is it reviewed?

Answer 8

A strategic plan is the overall aims and objectives of an organisation which is set by senior management. This is reviewed periodically.

Question 9

How are strategies identified within strategic planning?

Answer 9

Firstly the planning process identifies how the organization is going to achieve its strategic plan. This involves an internal and external analysis to decide what strategies will move the organization closer to its strategic objectives.

Secondly a detailed review of the organisation is carried; this is called a swot analysis and covers the following:
•	Strengths
•	Weaknesses
•	Opportunities
•	Threats

Question 10

Why is it important to co-ordinate the setting of the budget?

Answer 10

There are many resource budgets that need to be set and may of them are inter-related. This is time consuming therefore it is important for co-ordination to occur if meaningful budgets are to be produced.

Question 11

What is a budget manual and what seven things does it consist of?

Answer 11

A budget manual is a set of detailed instructions as to how the budgeted is to be prepared, including:
• Names of the budget holders – those responsible for producing the budgets
• The manager to whom each budget holder reports
• An organised chart
• The timescale for the production of each budget
• The procedures for preparing each budget
• The format of the budgets
• How and when actual performance is compared to the budget

Question 12

What is the budget committee?

Answer 12

The budget committee is the members of the organisation who are responsible for co-ordinating and administering all of the individual budgets, as well as reviewing and authorising each budget. An accountant know as the budget officer will usually assist the budget committee.

Question 13

Who are the budget holders?

Answer 13

The budget holders are the managers responsible for preparing the budget and ensuring the budget targets are met.

Question 14

What is the master budget?

Answer 14

Once all of the resource budgets have been agreed by the budget committee they are then incorporated into a master budget that takes the form of a budgeted financial statement and a cash budget.

Question 15

What are the five different methods of budgeting?

Answer 15

1. Rolling budget
2. Incremental budget
3. Zero based budgeting
4. Programme based budgeting
5. Activity based budgeting

Question 16

What is a rolling budget and explain its advantages and disadvantages?

Answer 16

A rolling budget is an annual budget that only looks at the forthcoming quarter in detail.

This has the advantage of allowing budget holders an committees to react to changes in circumstance, however, its disadvantage is that it also means the budget will be done more frequently taking up a lot of time.

Question 17

What is incremental budging and explain its advantages and disadvantages?

Answer 17

Incremental budgeting is when the budget for the forthcoming period is set by adding a percentage to the previous years budget to reflect any increase in price since the last budget was set, or any changes in activity level.

Advatages:
• Simple procedure requiring little management time
• Stable budget with gradual changes
• Co-ordination of budget is much easier

Disadvantages:
• Any inefficiencies in the original budget are repeated in the next period
• There is no incentive to reduce cost or develop ideas
• The budgets may become out of date
• There may be budgetary slack built into the budget

Question 18

What is zero based budgeting and explain its advantages and disadvantages?

Answer 18

Zero based budgeting is when the budget for each cost centre is looked at from scratch each period. Every item of expenditure must be justified before it can be included in the budget. This is generally approach from an activity based perspective. A decision package is complex for each item of activity that causes the expense, and the following five questions must be asked and answered:

1. Is the activity necessary?
2. Are there alternatives to this activity?
3. What are the costs of the alternatives?
4. What would ha[[en if the activity was not carried out?
5. Is the expense of the activity worth the benefit?

Advantages:
• It challenges the status quo and forces organisations to examine alternative activities and excising expenditure levels.
• Inefficiencies are not carried over from one budget to the next.
• The cost effectiveness for work practices and procedures is constantly being monitored
• Budgetary slack should be eliminated
• It is a good technique for service department costs and discretionary costs.

Disadvantages:
• It is time consuming, complex and costly
• Short term benefits are emphasized which may be irrelevant in the long term
• It is not useful for production departments where costs are largely dependent upon levels of production and sales.

Question 19

What is programme based budgeting?

Answer 19

Programme based budgeting is when the work of an organisation is split into programmes that achieve the organisational objectives. As there are often not enough funds to achieve all of the programs decisions are made as to which programmes are supported and to what level. This is most suitable for non-profit organisation.

Question 20

What is activity based budgeting?

Answer 20

Activity based budgeting is based upon activity based costing principles where the costs of the activities are driven by the cost drivers. The numbers of each cost driver that will be incurred must be considered and the cost of that driver.

Question 21

What are the four key areas when setting up a budgetory system?

Answer 21

1. Who sets the budget.
2. How achievable the budget is
3. Goal congruance
4. Performance and related pay

Question 22

What is top down budgeting and what are its advantages and disadvantages?

Answer 22

This is when senior management are solely responsible for setting the budget and impose them upon the managers, who are then responsible for meeting the targets.

Advantages
• Senior management will incorporate the strategic plans in all of the budgets
• The resourse (costs) of the budget will all be in harmony with each other
• Senior management have an overview of all of the resourse of the organization
• The budget will be produced more quickly
• Input from inexperienced junior management is eliminated

Disadvantages
• Managers may become demotivated by the prospect of meeting targets someone else has set
• The managers detailed knowledge of the department is not used
• The initiative of the lower level management is overlooked

Question 23

What is bottom up budgeting and what are its advantages and disadvantages?

Answer 23

Bottom up budgeting is when the budgets are prepared by the managers based upon their knowledge of the resource and costs associated with it and presented to senior management.

Advantages:
• The budgets are based on the detailed knowledge of the managers
• The motivation of the managers to achieve the budget which they have set should be increased
• The managers commitment to strategic plans should be increased

Disadvantages:
• The outcome of the negotiations within the budget committee may cause dissatisfaction
• Managers may be tempted to introduce budgetary slack so that their targets are always favourable
• The budgeting process will take more time and involve more personnel
• There may be a lack of co-ordination that will have to be corrected.

Question 24

What is the difference between an ideal budget and an attainable budget?

Answer 24

If it is ideal it may be unattainable and consequently be de-motivating; however, if it is set attainably then it can give staff achievable targets, which is motivating when met.

Question 25

How do you make performance related pay successful?

Answer 25

• Managers must know strategic goals and how their budgets work towards them
• The managers budget must be achievable but challenging
• Managers must have control over costs and have ability and freedom to meet their budgets, their performance must not rely on others
• The rewards offered by the business must be enticing

Question 26

What is the difference between a forecast and a plan?

Answer 26

A forecast is an expectation or estimate based on historical data and analysis whereas a plan is a deliberate commitment or intent.

Question 27

How do you ensure forecasts are relevant?

Answer 27

External factors such as economic, policatal, actions of competitors and technological advances all affect costs and revenues and must be built into the budget. Forecasts and budgets should be updated when new relevant information comes to light such as inflation and sales demand. By doing this it should minimise risk of budging.