Budgets

Question 1

What are the main purposes of Budgeting?

Answer 1

Planning - forces the organisation to look at future goals and objectives.

Responsibility - should provide motivation to managers and result in better targets.

Integration - guide all parts of the organisation & all levels of staff towards the same goals.

Motivation - Managers rewards based on achievement of budgetary targets.

Evaluation - by comparing actual to budgeted.

Question 2

How is Top down budgeting defined and what are the advantages and disadvantages?

Answer 2

Top Down budgeting is a non participative or imposed form of budgeting.

Targets are set by senior managers with no input from budget holders.

Advantages

• Can avoid dysfunctional behaviour and budgetary slack
• Quicker as fewer persons involved.
• Enables senior managers to retain control and reflects that they understand the needs of the whole organisation.

Disadvantages

• Lack of local knowledge and ownership
• Organisational goals may not be accepted/de motivates.
• Management initiative may be stifled.

Question 3

What is bottom up budgeting and what are its advantages and disadvantages?

Answer 3

Bottom up budgets are participative with divisional managers setting the targets.

Advantages

• Provide more realistic targets and as a result improve motivation.
• Free up senior management time.
• Improve the divisional managers understanding of the budgets and business goals.

Disadvantages

• Managers may build in budgetary slack to make targets more attainable.
• Co-ordination with other departments may be lacking.

Question 4

What are the different types of Budgets and when are they appropriate?

Answer 4

Incremental - Based or prior period with adj for inflation and other changes, suitable for stable business gives good cost control. Only works well if historical figures are accurate.

Zero Based Budgeting - Starting from scratch and justifying every line item, suitable for fast moving business, responds to changes in the business environment, through manager involvement improves knowledge and motivation.

Rolling - budget is continually updated at the end of each financial period. Fast moving or new organisations providing cost control, where managers take budgeting more seriously.

Question 5

What information sources are required for Budgeting?

Answer 5

Internal

• Prior year results.
• Business plans.
• other knowledge held by managers.

Statistics and Modelling

• Statistical analysis i.e. time series, to establish sales targets.
• EOQ - to determining inventory order cycles ect.

External Sources

• Competitors price lists/catalogs.
• Supplier price lists
• Inflation forecasts and other economic data.

Question 6

What are the 6 principles that a beyond budgeting should incorporate?

Answer 6

1. Clear Principles and boundaries -Manager should know what their authority and control cover.
2. Goals and targets linked to shareholder value that are based on relative success. May use the balanced scorecard principle.
3. A high degree of freedom given to managers to make decisions.
4. Responsibility for decisions that generate value to replaced with font line teams - TQM.
5. Front line teams have responsibility for customer relationship management. This will also extend to relationships with associate business ect.
6. Information systems should be transparent and ethical.