Budgetary Systems Flashcards
What is budgeting?
Budgeting is part of the overall process of planning and control.
What is a budget?
A budget is a financial/quantitative plan of operations for a forthcoming period.
What is the purpose of budgetary control?
PRIME;
P - Planning R - Responsibility I - Integration and Co-ordination (goal congruence) M - Motivation (target setting/rewards) E - Evaluation & Control
What is the purpose of planning?
Setting out what it is that we are trying to achieve. Presents a firm commitment of what the organisation is endeavoring to do.
What is the planning and control cycle?
- Determine objectives
- Planning a set budget - i.e. split into controlled periods.
- Operate in line with objectives
- Compare actuals with budget
How many budgetary systems are there?
Seven.
What are the seven budgetary systems?
- Fixed
- Flexible
- Flexed
- Incremental
- Activity Based
- Zero Based
- Rolling
What is a fixed budget?
A fixed budget is one that is not adjusted regardless of the level of activity attained in a period.
It is the master budget prepared before the beginning of the budget period.
Evaluate the pros and cons of a fixed budget
Pro: Sets out one clear target
Con: Becomes out of date quickly
Con: Often unrealistic because activity level is likely to differ from original forecasts.
What is a flexible budget?
A flexible budget is one that is designed to change as the volume of activity changes.
Enables what if scenarios such as most likely and best/worst case scenarios.
Evaluate the pros and cons of a flexible budget.
Pro: useful at the planning stage
Pro: Different results from various activity levels allow better planning for future uncertainty.
What is a flexed budget?
A budget that is flexed to reflect the actual activity level achieved in a given period before the comparison to actuals and variance analysis can begin.
Evaluate the pros and cons of a flexed budget
Pro: Budget restated based on actual volumes
Pro: Useful for control
Pro: Provides like for like comparison and meaningful variances
What is incremental budgeting?
Budget based on current year plus extra amounts for estimated growth or nflatiom.
Traditionally used where there are stable environments i.e. the public sector.
Evaluate the pros and cons of incremental budgeting.
Pro: Easy to do
Cons: Unnecessary spending
Cons: Builds in slack which doesn’t get stripped out and inefficiencies
Con; No business scrutiny.