Budgeting

Question 1

what is a budget?

Answer 1

an estimation of revenue and expenses over a period of time. must be fair and accepted by employees to be effective.

Question 2

what is strategic planning?

Answer 2

(long-term planning)

done by senior mgmt of the comp to guide the org in a particular direction

Question 3

budget vs strategic plan?

Answer 3

for shorter specific amount of time which falls within long-term. budget is more detailed.

Question 4

purposes of budgeting?

Answer 4

• planning
• coordination and communication
• resource allocation
• control
• performance evaluation

Question 5

planning in budgets?

Answer 5

takes strategic plans made by mgmt and quantifies them to make them acheivable

Question 6

coordination in budgets?

Answer 6

coordinates diff plans and actions in diff depts to create a common goal to work towards

Question 7

communication in budgets?

Answer 7

comm the resources available and constraints in a company so that diff depts can make useful decisions

Question 8

purpose of budgets? (c&c)

Answer 8

aims to influence mgmt behavior through c&c so that they make decisions that benefit the comp as a whole and not just one dept

Question 9

allocation of resource in budgets?

Answer 9

aims to allocate resources to diff depts based on needs and long-term comp objectives

Question 10

control in budgets?

Answer 10

assists mgmt in controlling their activities to meet budget requirements

Question 11

what is resp accounting?

Answer 11

defined as only holding mgmt accountable for the performance of their division / what they can control

Question 12

what is a resp centres?

Answer 12

sub-units of bus where the mgmt is held accountable for the performances and actions of the sub-unit

Question 13

what is a cost centre?

Answer 13

sub-unit where mgmt can only control the costs incurred in that sub-unit

Question 14

what is a revenue centre?

Answer 14

mgmt only resp for generating revenue

Question 15

what is a profit centre?

Answer 15

resp only for costs incurred and revenue (profit)

Question 16

what is an inv centre?

Answer 16

resp for revenue, costs, and inv decisions of that sub-unit

Question 17

why is a sales budget important?

Answer 17

as the number of units you plan to produce depends on the number of goods you plan to sell

Question 18

what is the cost budget?

Answer 18

a budget of all costs the bus expects to incur (f&v)

Question 19

what is a capital expenditure budget?

Answer 19

plans capex over a period, usually v large costs

Question 20

what is a financial budget?

Answer 20

incl. cash budget which plans cash flows the business expects to pay and receive. prepared on cash basis.

Question 21

types of participative budgeting?

Answer 21

top down

bottom up

Question 22

what is a top down budget?

Answer 22

senior mgmt prepares it. little empl input and imposes it on them

Question 23

adv of top down?

Answer 23

much faster and more cost effective bc no consultation

Question 24

disadv of top down?

Answer 24

top mgmt don’t know everything going on in the bus bc empl were not consulted. empl will be less willing to commit to it

Question 25

what is a bottom up budget?

Answer 25

determines the needs of low level empl > takes this to lower level mgmt who develop estimates which are sent to top mgmt, review and budget is set! provides senior mgmt more insight into entire comp needs

Question 26

adv of bottom up?

Answer 26

• improves accuracy
• managers who set their own targets will worker harder to achieve them
• encourages c&c among managers

Question 27

disadv of bottom up?

Answer 27

• time consuming
• expensive
• disagreements can cause conflict

Question 28

what is padding the budget?

Answer 28

occurs when managers understate revenue or overstate costs in order to meet budgetary requirements (bc they may receive a bonus)

Question 29

what is budgetary slack?

Answer 29

the diff between the accurate estimate and the managers provided estimate.

Question 30

why would managers pad the budget?

Answer 30

it helps them compete for resources to make their performance look better and to deal with uncertainty

Question 31

how to solve the problem of padding the budget?

Answer 31

mgmt can avoid making a budget a negative evaluation tool and provide incentives not only to meet the budget but to provide accurate estimates

Question 32

what are two difficulties with budgeting?

Answer 32

• motivating the employees

- getting the budget accepted

Question 33

how to motivate employees?

Answer 33

goal congruence – align comp and empl goals. they will then both make decisions that are best for the comp.

Question 34

how to get the budget accepted?

Answer 34

• employees must view the budget as fair and achievable – involve them in the budget setting process, hold them accountable for things that they can control, target achievement should produce rewards for them

Question 35

what are some budget setting techniques

Answer 35

• incremental approach
• zero-based budgeting
• activity-based budgeting approach

Question 36

what is the incremental budgeting approach?

Answer 36

takes the budget produced in the last period and makes adj based on expected changes in the next period (eg. inflation)

Question 37

adv and disadv of the incremental budgeting approach?

Answer 37

• time and cost effective

- any inefficiencies in the previous budget are carried over to the next

Question 38

what is zero-based budgeting?

Answer 38

starts each budget period from scratch and asks managers to provide their costs and justify why they need certain resources

Question 39

adv and disadv of zero-based budgeting?

Answer 39

• forces them to start @ zero and focus on what they need to create value
• time consuming and may be outdated in 3-5 years

Question 40

what is the activity-based approach?

Answer 40

1) determine COST DRIVERS
2) determine PRODUCTION LEVEL they expect to achieve
3) determine ACTIVITIES required for the processes at that level
4) determine RESOURCES needed for these activities
5) estimate QUANTITY of resources needed to meet demand
6) through this we know if we have enough capacity to meet demand

Question 41

why would the bus not want spare capacity?

Answer 41

it means they weren’t operating fully efficiently. would only be beneficial if you wanted to add a product line without hiring more workers/buying more mach.

Question 42

adv and disadv of the activity-based approach?

Answer 42

• explains how production is driven by certain exp and shows where you can inv or cut down
• time-consuming and requires a good understanding of resource consumption

Question 43

adv of budgeting?

Answer 43

• forces managers to plan
• helps allocate resources
• provides benchmarks for performance eval

Question 44

disadv of budgeting?

Answer 44

• setting realistic budgets is difficult
• budgetary slack
• time consuming for senior mgmt