Budgeting Flashcards
What is a budget ?
A detailed quantitative plan over a specified future period
Who does budget preparation involve?
Non-financial managers- not just accountants and financial managers
What are the differences between budgets and forecasts?
Forecasts are predictions of what is likely to happen in the future. It can be quantitative or qualitative.
How do forecasts help budgets?
Informs the budgeting process
Outlining the steps to strategic planning, budgeting and control process.
- Strategic planning process
- Creation of a long-term plan to implement strategies
- Preparation of the annual budget within context of the long-term plan
- Monitor actual results
- Respond to deviations from the plan
Define budgetary control
The process where actual results are compared to planned outcomes
What are variances in the context of budgetary control?
Significant differences between actual and budgeted results
What is control?
Monitoring and looking back to determine what actually happened and taking corrective action over variances.
What are the purposes of budgeting?
- Planning annual operations
- Corordination
- Communication plans
- Motivating managers
- Controlling activities
- Evaluating performance
What is the problem with the purposes of budgeting?
Budgeting has too many purposes, do these purposes conflict with one another?
What is the budget-setting process? (Traditional top-down0
- establish responsibility
- communicate budget guidelines to relevant managers
- identify the key of limiting factor
- prepare the budget for the area of the limiting factor
- prepare draft budgets for other areas
- review and co-ordinate budgets
- prepare the master budgets
- communicate the budget
- monitor actual performance relative to the budget
What is the master budget?
Overall final budgeted financial statements (Income statement etc)
What are the operating budget and the financial budget relative to the master budget?
They are the sub-budgets.
In more depth what does the operating budget include?
- Sales budget
- Production budget
- Selling and administrative budget
(Budgeted income statement)
What is include in the financial budgets?
- Capital expenditure
- Cash budget
(Budgeted balance sheet; budgeted statement of cash flow)
Look at slides to see interlinking between operating budgets
What is typically the limiting factor when budgeting? What does this mean?
The ability to sale
Sales budget is completed first
What is the open inventory of budgets?
The closing inventory from the period before
What approach is used year on year for traditional budgeting and what does this mean?
Incremental approach- figures are updated with expected inflation, growth in production etc year on year
What are the arguments against traditional budgeting?
- Too time-consuming nd costly
- Stunts growth –> doesn’t promote innovation
- Cannot deal with fast-changing environment
- Focuses on short-term targets
- Promotes managerial sharp practice
- Encourages incremental thinking
- Protects costs rather than lowering them
What are some alternative budgeting processes to traditional budgeting?
- Rolling budgets
- Zero-based budgeting
- Participative budgeting
- Beyond budgeting
What are rolling budgets?
- Cover short-periods (not incremental)
- Predicted forecasts are used
- The end date is rolling
What is the advantage of predicted forecasts being used in budgets?
Provides the opportunity for it to be updated as and when is needed
What is zero-based budgeting?
- The past is not taken into account when setting new budgets
- All items on the budget start from a zero budget base and thus need to be justified
What do zero-based budgets ensure?
That resources are allocated where they are needed
Who are zero-based budgets more suited to?
Organisations that do not have processes and businesses that are repeated on an annual basis.
What is participative budgeting?
- Bottom-up budgeting
- Some level of involvement from subordinates in setting up the budget rather than just top managers
What could be the negatives of participative budgeting?
- Building budgetary slack (people set lower targets)
- Can be more time-consuming which could be ineffective
What is beyond budgeting?
The philosophy that says that budgeting is useless in the top-down form.
- No fixed targets, relative targets such as industry benchmarks should be used
- Rewards are team based
- No annual budgets
- Advocates for a network structure rather than top-down.
Give some names of companies who use beyond budgeting.
Toyota and Sveska Handelsbanken
