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PFM > Budgeting > Flashcards

Budgeting Flashcards

1
Q

Give a definition for a budget

A

The budget is the quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows

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2
Q

What are the benefits of budgets for a business

A
  1. Help co-ordinate the various sections of the business
  2. Provide a system of authorisation
  3. Provide a basis for a system of control
  4. Motivate managers to better performance
  5. Promote forward thinking and identification of short-term problems
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3
Q

What is planning?

A

a systematic approach to long and short-term forecasting by which an organisation identifies its goals and the means of achieving them.

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4
Q

What is control?

A

the process of measuring performance and taking suitable corrective action to implement the organisation’s aims

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5
Q

What is responsibility accounting?

A

Responsibility accounting divides the organisation into budget centres, each of which has a manager who is responsible for its performance.
The budget is the target against which the performance of the budget centre or the manager is measured

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6
Q

What is a budgeting process?

A
  • Budget committee is formed
  • Budget manual is produced
  • Limiting factor is identified
  • Initial budgets are prepared
  • Initial budgets are reviewed and integrated into the complete budget system.
  • The master budget is prepared
  • Budgets are reviewed regularly.
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7
Q

What is traditional/incremental budgeting?

A

A method of preparation of the budget in which last year’s budget is taken as the base. Only those items in traditional budgets need to be justified which are over and above the last year’s budget.

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8
Q

What are the advantages of traditional/incremental budgeting?

A
  • Easy to prepare
  • Easy to implement
  • Bring stability in the functionality of the organization
  • Gives opportunity to consolidate projects into one single larger one
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9
Q

What are the criticisms of incremental budgeting?

A
  • Constrain responsiveness and flexibility
  • No requirement to justify all spending each year
  • Focus on detail loses strategic overview
  • Errors may be carried forward
  • Designed for vertical ‘command and control’
  • Encourage ‘gaming’ and perverse behaviour.
  • Developed and updated too infrequently.
  • Often based on unsupported assumptions and guesswork.
  • Reinforce barriers rather than encourage knowledge sharing, may reduce innovation
  • Make people feel undervalued.(Adapted from Bourne (2004), Better Budgeting Forum)
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10
Q

What are the different budgetary systems?

A

Periodic Vs Rolling Budgets

Incremental Vs Zero Based Budgeting

Activity Based Budgeting

Top Down Vs Bottom Up

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11
Q

What are the advantages of a rolling budget?

A
  • Budgets are up to date
  • Budgets are relevant to the current environment
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12
Q

What are the disadvantages of rolling budgets?

A
  • Time consuming and therefore expensive
  • Often requires a dedicated budgeting resource therefore more costly
  • Might cause problems with performance incentives
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13
Q

What are the advantages of zero based budgeting (ZBB)

A
  • Full review of all items
  • Actively involves operational managers
  • Establishes clear links between budgets and the organisation’s objectives
  • Questions accepted beliefs
  • Justification of all activities
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14
Q

What are the disadvantages of zero based budgeting?

A
  • Time consuming and expensive
  • Induces organisational conflicts
  • May be difficult to identify suitable activities
  • Uncertainty about costs and resources of options
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15
Q

What are the stages of activity based budgeting (ABB)?

A
  1. Estimate the production and sales volume by individual products and customers.
  2. Estimate the demand for organizational activities.
  3. Determine the resources that are required to perform organizational activities.
  4. Estimate for each resource the quantity that must be supplied to meet the demand.
  5. Take action to adjust the capacity of resources to match the projected supply.
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16
Q

What are the advantages of activity based budgeting (ABB)

A
  • Budgets based on cost drivers should more accurately reflect the cause of costs.
  • Enables focus on overhead and support costs.
17
Q

What are the disadvantages of activity based budgeting?

A
  • Costing system needed to match (ABC).
  • Time consuming, and therefore costly.
  • May require a cultural change.
18
Q

What is imposed/top down budgeting?

A

A budget which is set without permitting the ultimate budget holder to have the opportunity to participate in the budgeting process.

19
Q

What is participative/ bottom up budgeting?

A

A budgeting system in which all budget holders are given the opportunity to participate in setting their own budgets.

20
Q

What are the advantages of participative budgets?

A
  • Increased motivation
  • Should contain better information
  • Increases managers’ understanding and commitment
  • Better communication
  • Senior managers can concentrate on strategy.
21
Q

What are the disadvantages of participative budgets?

A
  • Loss of control
  • Inexperienced managers
  • Budgets not in line with objectives
  • Budget preparation slower and disputes can arise
  • Budgetary slack
  • Certain environments may preclude participation
22
Q

What factors affect participation?

A
  • Personality (Vroom 1960, Brownell 1981)
  • Work environment (Hopwood 1978)
  • Organisational structure (Bruns & Waterhouse 1975)
  • Managers’ outlook (Brownell 1981)
  • Perceived difficulty of job (Mia 1989)
23
Q

What is the control process?

A

Main use of the control process is as a “feedback” system, where divergences from plan can be recognised and action taken either to correct the deviation or to alter the plan if circumstances have changed.
Also possible to use the process more pro-actively as a “feedforward” system: predictions as to future problems are made and action taken to avoid them

24
Q

What are the key issues in relation to behavioural aspects of budgeting?

A
  • Management control systems
  • Motivation & target setting
  • Participation
  • Dysfunctional behaviour
25
Q

What is Hofstede’s view of behavioural aspects in budgeting?

A

Managers’ ability to influence their own budget targets may result in Budgetary Slack or Budget Gaming

  1. Budgets do not motivate unless accepted as personal targets
  2. Up to the point of non-acceptance, the more demanding the budget, the better the results
  3. Over-demanding budgets produce negative attitudes; “demanding but attainable” budgets are seen as positive incentives
  4. A two-way communication process makes acceptance of budget targets easier
26
Q

What is the view of Jack Welch?

A

“The budget is the bane of corporate America. It never should have existed. A budget is this: if you make it, you generally get a pat on the back and a few bucks. If you miss it, you get a stick in the eye - or worse…. Making a budget is an exercise in minimalisation. You’re always trying to get the lowest out of people, because everyone is negotiating to get the lowest number.”

27
Q

Who introduced the Handelsbanken management model and what was his view?

A

Jan Wallander, “either a budget will prove roughly right and then it will be trite, or it will be disastrously wrong and in that case will be dangerous”

28
Q

What is the Handelsbanken (Good bye budgeting) model?

A
  • Handelsbanken was losing customers in the 1960s and in search of new CEO (chose Wallander)
  • Abandoned budgeting in the early 1970s
  • Outperformed its Scandinavian rivals on almost every measure
    e.g. it has a cost-to-income ratio of 45% ; whereas for most international banks the ratio is 60% (2001).
29
Q

How does the Handelsbanken Bank look?

A
  • Organisation: only three layers, preventing micromanagement
  • Performance: company’s 11 regions compete like teams in a league
  • Resources: high level of discretion
  • Information: rolling cash forecasts enabling fast response to trends
30
Q

In what way have some companies branched away from budgeting?

A
  • Focus on external benchmarks
  • Incentives and targets separated from budgets
  • Orientation towards competitive advantage and strategy
  • Develop consistent IT systems
  • Improved forecasting models
  • Emphasis on managing future results, not explaining the past.
31
Q

What group marketised other methods than budgeting?

A

Beyond Budgeting

32
Q

What is a definition for budget?

A

“The budget is the quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.”

33
Q

Give a budget definition

A

“The budget is the quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.” It is a tool to implement organisational policies and is a battleground for cost control

34
Q

What are the four budgeting objectives?

A
  • Develop strategies—overall, long-term business goals
  • Plan—budget for specific actions to achieve goals
  • Act—carry out the plans
  • Control—feedback to identify corrective action
35
Q
A

PFM (2 decks)

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