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.
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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.
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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
Steps involved in Zero based Budgeting
- Activities are identified by managers. These activities are then described in what is called a
‘decision package’. This decision package is prepared at the base level, representing the
minimum level of service or support needed to achieve the organization’s objectives. Further
incremental packages may then be prepared to reflect a higher level of service or support. - Management will then rank all the packages in the order of decreasing benefits to the
organization. This will help management decide what to spend and where to spend it. - The resources are then allocated based on order of priority up to the spending level.
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Advantages of zero based budgeting
- Inefficient or obsolete operations can be identified and discontinued
- ZBB leads to increased staff involvement at all levels since a lot more information and work
is required to complete the budget - ZBB will respond to changes in the economic environment since the budget starts from
scratch each year and takes into account the environment at that time. - ZBB focuses attention on outputs in relation to value for money. This is particularly
important in the public sector where the 3 Es (economy, efficiency and effectiveness) are
often used to measure performance. - Resources should be allocated efficiently and economically as slack can be minimized.
Disadvantages of zero based budgeting
- Departmental managers will not have the skills necessary to construct decision packages.
They will need training for this and training takes time and money. - In a large organization, the number of activities will be so large that the amount of
paperwork generated from ZBB will be unmanageable. - Ranking the packages can be difficult, since many activities cannot be compared on the
basis of purely quantitative measures. Qualitative factors need to be incorporated but this is
difficult. - The process of identifying decision packages, determining their purpose, costs and benefits
is massively time consuming and therefore costly.
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just read about suitability
Suitability:
more suitable for public sector than for private sector
organizations. This is because, firstly, it is far easier to put activities into decision packages in
organizations which undertake set definable activities. Local government, for example, has set
activities including the provision of housing, schools and local transport.
Secondly, it is far
more suited to costs that are discretionary in nature or for support activities. Such costs
can be found mostly in not for profit organizations or the public sector, or in the service
department of commercial operations.
Since ZBB requires all costs to be justified, it would seem inappropriate to use it for the
entire budgeting process in a commercial organization. Why take so much time and
resources justifying costs that must be incurred in order to meet basic production needs? It
makes no sense to use such a long-winded process for costs where no discretion can be
exercised anyway. Incremental budgeting is, by its nature, quick and easy to do and easily
understood. These factors should not be ignored.
In conclusion, whilst ZBB is more suited to public sector organizations, and is more likely to
make cost savings in hard times such as these, its drawbacks should not be overlooked.
Activity Based Budgeting
ABB is defined as: ‘a method of budgeting based on an activity framework and utilizing cost
driver for the budget setting and variance feedback processes’.
Or, put more simply, preparing budgets using overhead costs from activity based costing
methodology.
Suitability:
The fixed costs may need close control and therefore some form of ABB may be appropriate.
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Activity Based Budgeting
ABB is defined as: ‘a method of budgeting based on an activity framework and utilizing cost
driver for the budget setting and variance feedback processes’.
Or, put more simply, preparing budgets using overhead costs from activity based costing
methodology
Advantages of Activity based budgeting
- It draws attention to the costs of ‘overhead activities’ which can be a large proportion of total
operating costs. - It recognizes those activities which drive costs. If we can control the causes (drivers) of
costs, then costs should be better managed and understood. - ABB can provide useful information in a total quality management (TQM) environment, by
relating the cost of an activity to the level of service provided
Disadvantages of ABB
- A considerable amount of time and effort might be needed to establish the key activities and
their cost drivers. - It may be difficult to identify clear individual responsibilities for activities.
- It could be argued that in the short-term many overhead costs are not controllable and do
not vary directly with changes in the volume of activity for the cost driver
Rolling Budget
A budget (usually annual) kept continuously up to date by adding another accounting period
(e.g. month or quarter) when the earliest accounting period has expired
Preparation of Rolling Budget
the rolling budget would be a budget covering a 12-month period and would be updated
monthly or quarterly.
However, instead of the 12-month period remaining static, it would always roll forward by one
month or quarter. This means that, as soon as one month or a quarter has elapsed, a budget is
prepared for the corresponding month or quarte
Advantages of Rolling Budget
- Planning and control will be based on a more accurate budget.
- Rolling budgets reduce the element of uncertainty in budgeting since they concentrate on
the short-term when the degree of uncertainty is much smaller. - There is always a budget that extends into the future (normally 12 months)
Disadvantages of Rolling Budget
- It forces management to reassess the budget regularly and to produce budgets which are
more up to date. - Rolling budgets are costlier and time consuming than incremental budgets
- May demotivate employees if they feel that they spend a large proportion of their time
budgeting or if they feel that the budgetary targets are constantly changing
what is Beyond Budgeting
Beyond Budgeting is a budgeting model which proposes that traditional budgeting should be
abandoned. Adaptive management processes should be used rather than fixed annual
budgets
Criticisms of budgeting
- Budgets are time-consuming and expensive.
- Budgets fail to focus on shareholder value.
- Budgets are too rigid and prevent fast response.
- Budgets protect rather than reduce costs.
- Budgets lead to unethical behavio
possible consequences in Changing Budgetary System
1.Resistance by employees- . Employees will be familiar with the current system and may have built in slack so will not easily accept new targets.
2.Loss of control- Senior management may take time to adapt to the new system and understand the implications of results
3.Training. In order to prepare and implement budgets under the new system, managers will need to be fully trained. This is time-consuming and expensive
4.Lack of accounting information- The organization may not have the systems in place to obtain and analyze the necessary information for preparing the new style budget. For example, an organization needs a system of activity-based costing if it is to implement
activity-based budgeting.
5.Fast forward costs of implementation. Any new system or process requires careful implementation which will have cost implications. For example, the procedures for preparing budgets will have to be re written in a new budget manual. Establishing a system of zero based budgeting, for example, will require the design and documentation of a large number
of decision packages
