Budgeting

Question 1

What is feedback control

Answer 1

also known remedial

Prepare budget - Perform - Collect information of acutal performance

• the info collected can provide feedback to adjust the budget and the performance

Question 2

What is feedforward control

Answer 2

also know as preventative

Prepare budget - prepare forecast of actual outcome - identify deviates between budget and forecast actual outcome

evaluate results and take action on deviations to adjust the budget or the forecast

Question 3

Difference between periodic budget and a continual budget

Answer 3

Periodic budget prepared for a particular period (usually one year)

Continual budget is continually update. A continual budget will add a new month to replace the month that has just passed, thereby ensuring that a budget for a full planning period (usually one year) is always available. A continual budget is also referred to as a rolling budget

Question 4

What are some uses of budgets

Answer 4

Promote forward-thinking and identification of short term problems

Help co-ordinate the various sections of the business

Provides a system of authorisation

Provide a basis for a system of control(management by exception)

Motivate managers to better performance

Question 5

Critcisms of budgeting

Answer 5

cannot deal with fast changing environment

focuses on short term financial targets

reinforces command and control structure

very time-consuming and costly

encourages incremental thinking (last year + x%)

tends to protect costs rather than lowering them

Question 6

What is a cash budget

Answer 6

reflects the whole business more comprehensively than any other budget

broken into sub periods (normally months)

each column for each month

Separated by receipts and payments

surplus or deficit between cash receipts and payments would be shown for each month

cumulative cash balance would be shown-taking the balance at the end of the previous month and adjusting for the surplus or deficit for the current month

Question 7

What does flexing the budget mean

Answer 7

Revising the budget for a different volume of output

we need to know which revenues and costs are fixed and which are variable relative to the volume of output

Question 8

What is incremental budgeting

Answer 8

Budgets are set on the basis of what happened last year with some adjustments for any changes in factors that are expected to affect the forthcoming budget period (such as inflation)

• common in local and central government
• also used for discretionary budgets (research and development )

Question 9

What is zero based budgeting

Answer 9

all spending needs to be justified

budgets start at zero every year and will only be increased if there is a good reason to do so.

forces budget holders to think more carefully about what they do and how they do it

results in a more appropriate and efficient budget

Question 10

What is activity based budgeting (ABB)

Answer 10

extends the principles of ABC to the budgeting process

budgets are prepared based on activities carried out, not the functions of the business

in theory provides a more accurate budget

can be costly and time consuming and also needs a system of ABC