Budgeting & budgetary control (19)

Question 1

Short term (DEFINITION)

Answer 1

For the next year (typically next financial year)

Question 2

Medium term (DEFINITION)

Answer 2

1 to 3 years ahead

Question 3

Long term (DEFINITION)

Answer 3

From 3 years ahead and beyond

Question 4

Business objectives (DEFINITION)

Answer 4

Goals or targets set by a business - associated with medium and long term planning

Question 5

Budget (DEFINITION)

Answer 5

A financial plan for a business, prepared in advance

Question 6

Incremental budgeting (DEFINITION)

Answer 6

Percentage is added to previous budget to allow for general rises in inflation

Previous budget –> Increments –> New budget

Question 7

Advantages of Incremental budgeting

Answer 7

Generally quick and easy to prepare

Most suitable for stable businesses where an incremental increase can be applied to the previous period’s figures, e.g. increase in wages and salaries

Question 8

Disadvantages of Incremental budgeting

Answer 8

Inefficiencies and overspending remain in the budget

Activities may continue that are uneconomic (e.g. components made ‘in-house’ when it would be cheaper to purchase)

Budget holders may often seek to spend their budgeted expenditure in order to ensure that the next period’s budget is the same, or a larger amount