Budgeting and Control Flashcards
Top down budgeting
Budget set with overall corporate objectives by the senior management
Bottom up (participative)
Departmental objectives set by local management, given from bottom up
Advantages and disadvantages of bottom up
Advantage
- More realistic, as actual relevant experience
- Staff take ownership
- Greater motivation
- Saves time for senior management
Disadvantages
- Local objectives may differ from corporate objectives
- Scope for disagreement between staff
- Budgetary slack may be built in
- Budgets may be less accurate, as less experienced people creating them
Rolling budget
Advantages
Disadvantages
Budget establishes at the beginning of a period and constantly amended throughout
Advantage
- encouraging staff to continuous look at changing variables
- Times of uncertainty, better to be able to update information once it is known
Disadvantages
- Continually changing goals may demotivate staff
- not easily understood
- more time and effort
zero based budget
Advantages
Disadvantages
A budget that requires managers to justify every expenditure (including items accepted in previous periods). Managers include every possible expenditure in ‘decision packages’, Directors will then rank and approve the most important decision packages.
Advantages
- Responsive to changes in economic environment
- More efficient at allocating resources
- Drives managers to find cost effective improvements
- Detect inflated budgets
Disadvantages
- Time consuming to justify costs
- Need to rain managers to understand
Activity based budgets
Budget based off activity level and cost drivers Advantages - Focus on the drivers behind costs Disadvantages - Time consuming - Difficult to understand
Incremental budgets
ADV
DIS
Current budget or actual results adjusted for inflation and possible growth ADV - Stable and easy to understand -Quick impact of changes easy to see DIS - no incentive to reduce costs - encourages spending up to the budget
The master budget
Collates individual budgets from different departments into a consistent format used in annual accounts includes a P&L, balance sheet and cash flow.
Functional budget
Individual budgets for different functions (sales, production and labor)
Fixed budgets
Produced at the start of the year and doesn’t change until the next year
Flexible budgets
Produced at the start of the year and include different activity levels
Feed-forward and Feedback control
Feed-forward system = comparing the four cast results to the budget and taking corrective action when deviating from budget (cash flow budget - noticing an issue coming up and moving cash to cover)
Feedback system = budget versus actual (variance analysis)
Beyond budgeting
Hope and Fraser
Criticism of budgeting: Time consuming and expensive May have little value to users Does no focus on shareholder value Rigid and prevents fast response
High low methods
Fixed and variable costs can be analysed using the high low method
step 1 - select highest and lowest activity levels( and their known costs)
step 2 - calculate variable cots per unit ((total cost at high activity - total cost at low activity)/(high activity in units - low activity in units))
Learning effect
Time taken will reduce as task is performed competitively Y = ax^b a = time taken for first unit x = cumulative number of units produced b = learning factor (log LR)/log2 LR = the learning rate as a decimal
