Budgeting

Question 1

What is a budget?

Answer 1

It is a financial plan relating to the future. It can be for the whole company or for department or functions.
It is usually for one year or less

Question 2

Why would we budget?

Answer 2

• Planning as it forces management to look ahead
• Control as it allows the calculation of variances and highlights problems
• Communication as it helps communicate plans to budget holders and employees
• Goal congregation
• Allows for a evaluation
• Motivates as budget performance is often linked to rewards

Question 3

Advanced years and disadvantages of budgeting

Answer 3

Advantages
- Help us motivate and communicate goals

• forces consideration of impact of future changes
• Improves decision-making

Disadvantages
- Expensive and time-consuming

• Subjective and open to bias
• Encourages short-termism
• Encourages overspending to safeguard future budgets

Question 4

What is incremental budgeting?

Answer 4

Adjusting the previous years budget for inflation and cross increases

Advantages
- Easy
- Cheap
- Suitable for stable environments

Disadvantages
- Ignore environmental changes changes
- Build some inefficiencies
- Too easy/budget slack
- Encourages overspend
- Errors aren’t corrected

Question 5

What is zero based budgeting?

Answer 5

Everything is budgeted from scratch as if we had never budgeted before

You would need to establish activities and objectives , establish decision packages, rank decision packages and allocate resource

Advantages
- improves accuracy
- Improves utilisation
- Justified changes
- Improved performance measure
- Best suited to changing environments

Disadvantages
- Expensive
- Time consuming
- Difficult
- Requires training

Question 6

What is activity based budgeting?

Answer 6

Budgets are set for each activity using the costs determined by activity based costing.

Advantages
- Overheads are significant
- Cost control and cost cutting it easier
- Useful in total quality management environments as a focus on continuous improvement

Disadvantages
- Expensive
- Only useful if using activity base costing

Question 7

What is beyond budgeting?

Answer 7

This is different to traditional budgeting with a greater use of rolling budgets, non-financial targets and innovation is encouraged and rewarded. Each budget is set locally.

Advantages
- Planning is continuous
- Targets are more useful and challenging
- Organisation becomes more innovative and flexible as focused on continuous improvement
- Decisions and motivation from local involvement

Disadvantages
- Very complex
- Harder to achieve communication and goal congregants are set locally
- Expensive to implement and maintain
- Resistance targets become more challenging