Budgeting

Question 1

Planning Definition

Answer 1

Developing objectives and preparing various budgets to achieve those objectives

Question 2

Control Definition

Answer 2

Steps taken by management to increase the likelihood that the objectives set are attained and that all parts of the organisation are working together toward that goal

Question 3

Advantages of Budgeting

Answer 3

1. Defines Goals and objectives
2. Think about and plan for the future
3. Means of allocating resources
4. Uncover potential bottlenecks
5. Coordinate activities
6. Communicate plans

Question 4

Responsibility Accounting

Answer 4

Managers should be held responsible for those items and ONLY those items that they can actually control to a significant extent

Question 5

Bottom-up budgeting

Answer 5

Also known as self-imposed budget or participative budget
Lower-level management -> Top Management

Question 6

Advantages of Bottom-up budgeting

Answer 6

1. Individuals at all levels of the organisation are viewed as members of the team whose judgements are valued by top management
2. Budget set by front-line managers, making it more accurate
3. Motivation is generally higher for individuals who participate in setting their own goals
4. Managers will not be able to claim that it was unrealistic as it was self-imposed

Question 7

Advantages of Top-down Budgeting

Answer 7

1. Avoid the potential budgetary slack
2. Provide a clearer performance goals and expectations from the top management
3. May provide better budget due to top management’s access to privileged/confidential market and organisation information.
4. Provide an efficient budgetary process

Question 8

Budgetary slack (budget padding)

Answer 8

underestimating to ensure meeting the budget

Question 9

Budget Lapsing

Answer 9

Any unused funding at the end of the financial period cannot be carried forward.
If there is any under-expenditure in the current year, it would mean there would be less funds allocated for the following year

Question 10

Advantages of Budget Lapsing

Answer 10

1. Helps ensure that the appropriate level of resources is utilised in each period; risk-adverse managers may unnecessarily accumulate funds and this may adversely affect the performance of the organisation.
2. Helps provide an opportunity for a clean cut-off of expenditures and to reallocate any unused resources for other more appropriate requirements

Question 11

Problem and solution of Budget Lapsing

Answer 11

Budget lapsing can cause undesired behaviour effects. such as wastefully spending their entire budget before the end of the period to avoid budget cuts

Solution: Having a system of reviewing the expenditures near end of the period may uncover unnecessary expenditures and discourage managers to wastefully spend because of budget lapsing

Question 12

Incremental Method

Answer 12

Start off budget by referring back to previous year’s figures. however, any inefficiency may be carried forward

Question 13

Zero Based

Answer 13

Assumption that the company had just started