budgeting Flashcards
what is a budget
is a plan for the future expressed in quantitative terms
what are the objectives to a budgetary control system
planning- so that managers can plan for future and detailed plans can ensure the implementation of the companies long term goals
co-ordination- to ensure all departments work in sync so efficiency tis high and so no slow downs are there in production
communication- expectations need to be communicated from top down to ensure that lower end staff understand hoe to plan their lives in order to be in sync with company goals
motivation- motivated staff to stick to the short terms targets set and be more efficient
control- to ensure managers are acting in accordance to company rules and goals and can be help accountable
to evaluate performance- can be used to measure performance of business nd keep costs low
to ensure achievement of the managements objective- these smaller targets being achieved can lead to the long term success of the company
what are the 7 steps of panning and control cycle
- identify objectives
- identify potential strategies
- evaluate strategies
- choose alternative courses of action
- implement the long term plan
- measure actual results and compare with the plan
- respond to divergencies from the plan
what is feedback
Feedback is any response to your business practice, whether it comes from your clients or customers, or whether it is provided by your employees or leadership team.
what are the 3 types of feedback used for control
negative feedback -idicates that they are deviating form plan and must be brought beck on course
positive feedback - results in control action continuing the current course. results are going well and no changer needed
feed forward control - control based on forecast results: in other words if the forecast is bad, control action is taken well in advance of actual results
what are the other 2 loop styles of feedback
single loop feedback- Single loop feedback, normally expressed as feedback. is the feedback relatively small variations between actual and plan. This implies that the existing plans will not change.
double loop feedback - The emphasis would be on double loop learning, which means that underlying assumptions, norms, and objectives would be open to confrontation. so results and budgets can be changed
what is the mnemonic for advantages and disadvantages
M (Motivation)
R (Responsibility Accounting)
R (Realistic Budget)
E (Expenditure of making the budget)
S (Slack in the budget)
T (Time needed to prepare the budget)
what is top down approach
Top-down budgeting is when senior management prescribes a budget for the entire organization.
Advantages of imposed style( imposed without consulting lower level managers)
- Involving junior managers in the setting of budgets is more time consuming than if senior
managers simply imposed the budgets. - Managers may not have the skills or motivation to participate usefully in the budgeting
process. - Senior managers have the better overall view of the company and its resources and may be
better placed to create a budget which utilizes those scarce resources to best effect. - Senior managers also are aware of the longer term strategic objectives of the organization
and can prepare a budget which is in line with that strategy. - By having the budgets imposed by senior managers, i.e. someone outside the department,
a more objective, fresher perspective may be gained.
104
what is Participative Budgets
bottom up where lower level gives a plan and then i9t is p[assed up the company to make sure it achieves long term goals
Advantages of participative budgets
- The morale of the management is improved. Managers feel like their opinion is listened to,
that their opinion is valuable. - Managers are more likely to accept the plans contained within the budget and strive to
achieve the targets if they had some say in setting the budget, rather than if the budget was
imposed upon them. Failure to achieve the target that they themselves set is seen as a
personal failure as well as an organizational failure. - The lower level managers will have a more detailed knowledge of their particular part of
thebusiness than senior managers and thus will be able to produce more realistic budgets.
105
what is Incremental budgeting
whereby a budget is
prepared using a previous period’s budget or actual performance as a base, with incremental
amounts then being added for the new budget period. The budget is prepared after an adjustment for inflation and other incremental factors.
Advantages of Incremental Budgeting
- Incremental budgeting is very easy to perform. This makes it possible for a person without
any accounting training to build a budget. - Incremental budgeting is also very quick compared to other budgeting methods.
- The information required to complete it is also usually readily available
Disadvantages of Incremental Budgeting
- On the other hand, incremental budgeting encourages inefficiency because it does not
question the preceding year’s figures on which it is based. No-one asks how those figures
could be reduced. - Similarly, in some organizations, it encourages slack because departmental managers may
attempt to use their entire budget up for one year, even if they do not need to, just to ensure
that that cash is available again the next year.
106 - Errors from one year are carried to the next, since the previous year’s figures are not
questioned
Zero based Budgeting
‘Zero-based budgeting’, on the other hand, refers to a budgeting process which starts from a
base of zero, with no reference being made to the prior period’s budget or performance