Budgeting Flashcards

1
Q

Types of budgeting

A
Fixed 
Flexible
Rolling
Activity Based Budgeting
Zero Based Budgeting (ZBB)
Incremental
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Purpose of Budgeting

A
Planning
Control
Communication
Co-ordination
Evaluation
Motivation
Authorisation 
Delegation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Advantages of bottom-up

budgeting

A
• Improved motivation due to a
sense of ownership and
empowerment.
• It increases divisional
managers’ understanding
(which has an additional benefit
if personal targets are set from
the budget).
• Frees up senior management
resource.
• Improves the quality of decision
making since divisional
managers are close to their
product markets.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Advantages of top-down

budgeting

A

• Avoids budgetary slack
(i.e. divisional managers may be
tempted to set targets that are
too easy to achieve).

• Avoids dysfunctional behaviour
(i.e. divisional managers lack a
strategic perspective, focusing
on the needs of the division
and, as a result, budgets may
not be in line with corporate
objectives).

• Senior managers retain control.

• Budget setting process can be
quicker.

• Avoids the problem of bad
decisions from inexperienced

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Advantages and disadvantages of flexible budgeting

A

Advantage

Should enable better
performance evaluation as
comparing like with like.

Disadvantages

• May be perceived by some as ‘moving
the goal posts’ resulting in demotivation –
especially if bonuses are lost despite
beating the original budget.

• Difficulties splitting costs into fixed and
variable elements.

• In the long run it could be argued that all
costs are variable.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Incremental budgets

A

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.

Suitability

  • It is suitable for stable businesses, where costs are not expected to change significantly.
  • There should be good cost control.
  • There should be limited discretionary costs.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Incremental budgets - Advantages

A

• Quickest and easiest method.

• Assuming that the historic
figures are acceptable, only the
increment needs to be justified.

• Avoids ‘reinventing the wheel’ if
there is good cost control, a
stable business and limited
discretionary spend.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Incremental budgets - Disadvantages

A

• Builds in previous problems and
inefficiencies.

• Simply increasing the budget by
an increment does not
encourage managers to be more
efficient in controlling costs or to
find new, innovative ways of
doing things.

• Uneconomic activities may be
continued.

• Managers may build in slack
(i.e. make the budget easy to
achieve), for example, to help
secure the receipt of a reward
that is aligned to the
achievement of the budget.
• Managers may spend up to their
budget to ensure that they get an
increment from the highest
possible base figure in the
following year.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Zero based budgets (ZBB)

A

Zero based budgeting (ZBB) is a method of budgeting that requires each cost element to be specifically justified, as though the activities to which the budget
relates were being undertaken for the first time. Without approval, the budget allowance is zero.

Suitability

  • Fast moving businesses/industries.
  • Discretionary costs such as research and development (R&D).
  • Public sector organisations such as local authorities.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

ZBB process

A

There are four distinct stages in the implementation of ZBB:

(1) 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. It should be drawn up in such a way that the package
can be evaluated and ranked against other packages.

(3) Each decision package is evaluated and ranked usually using cost/benefit
analysis.

(4) The resources are then allocated to the various packages.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Advantages of ZBB

A

• Inefficient or obsolete operations
can be identified and
discontinued.

• ZBB leads to increased staff
involvement at all levels. This
should lead to better
communication and motivation.

• It responds to changes in the
business environment.

• Knowledge and understanding of
the cost-behaviour patterns of
the organisation will be
enhanced.

• Resources should be allocated
efficiently and economically.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Disadvatage of ZBB

A

• The time involved and the cost of
preparing the budget are much
greater than for less elaborate
budgeting methods.

• It may emphasise short-term
benefits to the detriment of longterm
benefits.

• The budgeting process may
become too rigid and the
company may not be able to
react to unforeseen opportunities
or threats.

• There is a need for management
skills that may not be present in
the organisation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Advantages of ABC

A
Provides a more accurate cost
per unit leading to better pricing,
decision making and
performance management.
• It provides a better insight into
what drives overhead costs
resulting in better control of
costs.
• It recognises that overhead costs
are not all related to production
and sales volumes.
• It can be applied to all overhead
costs, not just production
overheads.
• It can be used just as easily in
service costing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Disadvantages of ABC

A

• Limited benefit if overheads are
primarily volume related or a
small proportion of total costs.

• It is impossible to allocate all
overheads to specific activities.

• The choice of activities and cost
drivers might be inappropriate.

• The benefits might not justify the
costs (initial set up costs, staff
training costs, cost of potential
staff resistance, cost of changing
systems to capture information
required and the ongoing cost of
using ABC).

• It may be difficult to assign
responsibility for individual costs
pools.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Activity-based budgeting

A

Activity-based budgeting (ABB) uses the principles of ABC to estimate the
firm’s future demand for resources and hence can help the firm to acquire these
resources more efficiently.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Disadvantages of ABB

A
• A considerable amount of time
and effort might be needed to
establish an ABB system
(identifying the key activities and
their cost drivers).
• Staffing issues, for example
resistance to change or the cost
of training staff.
• The cost of adapting information
systems so that they can collect
and process a large amount of
activity and cost driver
information.
• ABB might not be appropriate for
the organisation and its activities
and cost structures.
• It may be difficult to identify clear
individual responsibilities for
activities.
• It could be argued that in the
short-term many overhead costs
are not controllable and do not
vary directly with changes in the
volume of activity for the cost
driver. The only cost variances to
report would be fixed overhead
expenditure variances for each
activity.
17
Q

Advantages of ABB

A
• ABB draws attention to the costs
of overhead activities which can
be a large proportion of total
operating costs.
• It can be used to identify CSFs,
for example a specific activity that
must be done quickly, accurately
or efficiently.
• It recognises that it is activities
that drive costs. If we can control
the causes (drivers) of costs,
then costs should be better
managed and understood.
• It provides information for the
control of activity costs, by
assuming that they are variable,
at least in the longer-term.
• ABB can provide useful
information for a total quality
management (TQM)
environment, by relating the cost
of an activity to the level of
service provided.