Budgeting

Question 1

what are the objectives of budgeting

Answer 1

achieve objectives,
motivate managers,
encourage goal congruence

Question 2

when does goal congruence exist

Answer 2

when managers work in the best interests of their own division but also in harmony with the overall goals of the company

Question 3

what is the difference between primary and secondary objectives (budgeting)

Answer 3

primary objectives - most important (profit, sales),

secondary objectives - (increase in productivity, increase in customer satisfaction

Question 4

how might conflicting corporate objectives be resolved

Answer 4

prioritisation,
negotiation,
compromise,
satisficing

Question 5

what is feedback

Answer 5

when results (outputs) of a system are used to control it, by adjusting the input or behaviour of the system

Question 6

what is negative feedback

Answer 6

deviated from plan, so activities must be brought back on course

Question 7

what is positive feedback

Answer 7

can continue on current course

Question 8

what is feed forward controls

Answer 8

the plan needs changing, difference between forecasts and budgets

Question 9

what are the functions of a budget *

Answer 9

planning annual operations,
coordinating activities across organisation,
communicating plans to responsibility centre managers,
motivating managers,
controlling activities (by feedback),
evaluating performance of managers

Question 10

what are the behavioural implications of budgeting *

Answer 10

managers who set budgets, are often not responsible for achieving them,
goals of organisation may not coincide with personal aspirations of the managers (no goal congruence),
control can be applied at different stages by different people (coordination becomes very important)

Question 11

what is mazlow’s hierarchy of needs from the bottom

Answer 11

physiological needs (hunger, thirst),
safety needs (security, protection),
social needs (love),
esteem needs (self esteem, status, recognition),
self actualisation (achieving one's full potential)

Question 12

what are some negative attitudes that can arise when setting budgets *

Answer 12

managers complain they are too busy to spend time on budgeting,
may build slack into their budget,
managers argue the budget is too restrictive and takes away flexibility,
managers do not coordinate budgets with those of other parts of business,
may base future plans on past results

Question 13

what are some negative attitudes that can arise when implementing budgets *

Answer 13

managers just try to achieve target rather than exceed it,
formal budget may encourage rigidity and discourage flexibility,
short term budget can take attention away from long term strategy,
can be minimal cooperation/communication between managers,
managers will often spend their whole budget allowance even if not really required

Question 14

what are some negative attitudes that can arise when getting feedback (budget process) *

Answer 14

management accounting reports given a low priority,
managers may resent feedback (see it as fault finding),
managers may not understand the information presented,
flaws in system recording costs will lead managers dismissing reports,
managers can be held responsible for costs outside their control

Question 15

what can be said about ideal standards, low standards and targets that are the same level as before (different for each one)

Answer 15

ideal standards can be demotivating,
low standards of efficiency can be demotivating,
targets at same level as before can be demotivating

Question 16

what does an aspirations budget do

Answer 16

motivate staff

Question 17

what are the 3 distinct styles of using budget and cost information in performance evaluation

Answer 17

budget-constrained style,
profit-conscious style,
non-accounting style

Question 18

explain style of using budget and cost information ‘budget-constrained style’

Answer 18

where not achieving budget results in punishment and achievement in rewards

Question 19

explain style of using budget and cost information ‘profit-conscious style’

Answer 19

where good reasons for budget departure can still result in rewards (ie more flexibility)

Question 20

explain style of using budget and cost information ‘non-accounting style’

Answer 20

budget relatively unimportant

Question 21

evaluation of pay as a reward for managers

Answer 21

depends on character of manager,
targets need to be fair (but challenging),
can lead to dysfunctional behaviour if too much vested interest (eg padding budget)

Question 22

what are the three ways a budget can be set

Answer 22

top-down (imposed budget),
bottom-up (participatory budget),
negotiated

Question 23

what is a top-down budget

Answer 23

senior management prepare budget with little or no input from operational staff

Question 24

when is a top-down budget effective

Answer 24

in a newly formed organisation,
in a very small business (senior managers better informed),
if staff lack budgeting skills,
when a number of different units require precise coordination

Question 25

what are the advantages of a top-down budget

Answer 25

strategic plans (ie top level) are incorporated into planned activities,
enhanced coordination between divisions,
total resource availability considered,
decreases input from inexperienced managers,
budget is produced in a shorter time

Question 26

disadvantages of a top-down budget

Answer 26

dissatisfaction defensiveness and low morale amongst employees,
loss of team spirit,
low acceptance of the budget,
budget tends to feel like a punitive device,
unachievable budgets may result,
management initiative may be stifled,
ignores training and progression opportunities for staff

Question 27

what is a bottom-up budget

Answer 27

developed by lower-level managers who submit them to senior management, based on managers’ perceptions of what is achievable and resources required

Question 28

when is a bottom-up budget effective

Answer 28

in well established companies,
in very large companies,
during economic boom times, as less risk then,
when managers have strong budgeting skills,
when different units act autonomously

Question 29

what are the advantages of a bottom-up budget

Answer 29

based on information from those ‘on the spot’,
knowledge from all operational levels pulled together,
morale and motivation improved,
increased commitment to objectives,
more realistic and often more accurate,
coordination improved,
specific resource requirements included

Question 30

what are the disadvantages of a bottom-up budget

Answer 30

takes longer,
takes up time throughout organisation that could be spent operationally,
if senior management then change the budget it can cause resentment,
budget slack often gets introduced,
needs managers to be skilled in budget setting and have a coordinated knowledge of business

Question 31

what is a negotiated budget

Answer 31

when in practice different levels of management often agree budgets by a process of negotiation,
in top down budget operational managers will try to negotiate the targets they consider to be unreasonable,
in bottom-up budget senior management review and revise budgets presented to them