Budgeting

Question 1

What is a budget ?

Answer 1

A detailed quantitative plan over a specified future period

Question 2

Who does budget preparation involve?

Answer 2

Non-financial managers- not just accountants and financial managers

Question 3

What are the differences between budgets and forecasts?

Answer 3

Forecasts are predictions of what is likely to happen in the future. It can be quantitative or qualitative.

Question 4

How do forecasts help budgets?

Answer 4

Informs the budgeting process

Question 5

Outlining the steps to strategic planning, budgeting and control process.

Answer 5

1. Strategic planning process
2. Creation of a long-term plan to implement strategies
3. Preparation of the annual budget within context of the long-term plan
4. Monitor actual results
5. Respond to deviations from the plan

Question 6

Define budgetary control

Answer 6

The process where actual results are compared to planned outcomes

Question 7

What are variances in the context of budgetary control?

Answer 7

Significant differences between actual and budgeted results

Question 8

What is control?

Answer 8

Monitoring and looking back to determine what actually happened and taking corrective action over variances.

Question 9

What are the purposes of budgeting?

Answer 9

• Planning annual operations
• Corordination
• Communication plans
• Motivating managers
• Controlling activities
• Evaluating performance

Question 10

What is the problem with the purposes of budgeting?

Answer 10

Budgeting has too many purposes, do these purposes conflict with one another?

Question 11

What is the budget-setting process? (Traditional top-down0

Answer 11

1. establish responsibility
2. communicate budget guidelines to relevant managers
3. identify the key of limiting factor
4. prepare the budget for the area of the limiting factor
5. prepare draft budgets for other areas
6. review and co-ordinate budgets
7. prepare the master budgets
8. communicate the budget
9. monitor actual performance relative to the budget

Question 12

What is the master budget?

Answer 12

Overall final budgeted financial statements (Income statement etc)

Question 13

What are the operating budget and the financial budget relative to the master budget?

Answer 13

They are the sub-budgets.

Question 14

In more depth what does the operating budget include?

Answer 14

• Sales budget
• Production budget
• Selling and administrative budget

(Budgeted income statement)

Question 15

What is include in the financial budgets?

Answer 15

• Capital expenditure
• Cash budget

(Budgeted balance sheet; budgeted statement of cash flow)

Question 16

Look at slides to see interlinking between operating budgets

Question 17

What is typically the limiting factor when budgeting? What does this mean?

Answer 17

The ability to sale

Sales budget is completed first

Question 18

What is the open inventory of budgets?

Answer 18

The closing inventory from the period before

Question 19

What approach is used year on year for traditional budgeting and what does this mean?

Answer 19

Incremental approach- figures are updated with expected inflation, growth in production etc year on year

Question 20

What are the arguments against traditional budgeting?

Answer 20

• 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

Question 21

What are some alternative budgeting processes to traditional budgeting?

Answer 21

• Rolling budgets
• Zero-based budgeting
• Participative budgeting
• Beyond budgeting

Question 22

What are rolling budgets?

Answer 22

• Cover short-periods (not incremental)
• Predicted forecasts are used
• The end date is rolling

Question 23

What is the advantage of predicted forecasts being used in budgets?

Answer 23

Provides the opportunity for it to be updated as and when is needed

Question 24

What is zero-based budgeting?

Answer 24

• 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

Question 25

What do zero-based budgets ensure?

Answer 25

That resources are allocated where they are needed

Question 26

Who are zero-based budgets more suited to?

Answer 26

Organisations that do not have processes and businesses that are repeated on an annual basis.

Question 27

What is participative budgeting?

Answer 27

• Bottom-up budgeting
• Some level of involvement from subordinates in setting up the budget rather than just top managers

Question 28

What could be the negatives of participative budgeting?

Answer 28

• Building budgetary slack (people set lower targets)
• Can be more time-consuming which could be ineffective

Question 29

What is beyond budgeting?

Answer 29

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.

Question 30

Give some names of companies who use beyond budgeting.

Answer 30

Toyota and Sveska Handelsbanken