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PM > Chapter 10 - Budgeting > Flashcards

Chapter 10 - Budgeting Flashcards

1
Q

What is a budget?

A

A quantitative plan prepared for a specific time period.

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2
Q

What are the purposes of a budget?

A

Planning
Responsibility
Integration
Motivation
Evaluation

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3
Q

What do budgets contribute towards?

A

performance management by providing benchmarks against which to compare actual results (through variance analysis), and develop corrective measures

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4
Q

Budgets take many forms and serve many functions, but most provide the basis for what?

A

Detailed sales targets
Staffing plans
Production
Cash investment and borrowing
Capital expenditure

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5
Q

What does strategic planning look at?

A

the whole organisation and defines resource requirements e.g., development of new products

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6
Q

What does tactical planning look at?

A

the department/divisional level and specifies how to use resources, e.g., to train staff to deal with the challenges that this new product presents

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7
Q

What does organizational planning look at?

A

concerned with control. budget is set for the new product to include advertising expenditure, sales forecasts, labour

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8
Q

What are the different management styles?

A
  • Budget constrained style
  • Profit conscious style
  • Non-accounting style
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9
Q

What is a budget-constrained style?

A
  • Manager is evaluated on ability to achieve budget in the short term
  • Manager will be criticised for poor results
  • job-related pressure
  • may result in short-term decision making at the expense of long-term goals
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10
Q

What is a profit conscious style?

A
  • manager evaluated on ability to reduce costs and increase profits in the long term
  • less job-related pressure
  • better working relations with colleagues
  • less manipulation of data
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11
Q

What is a non-accounting style?

A
  • manager evaluated mainly on non-accounting performance indicators such as quality and customer satisfaction
  • Similar to profit-conscious style but there is less concern for accounting information
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12
Q

What is a expectations budget?

A
  • A budget set at current achievable levels.
  • Unlikely to motivate managers to improve but may give more accurate forecast
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13
Q

What is a aspirations budget?

A
  • A budget set at a level that exceeds the level currently achieved.
  • May motivate managers to improve if it is seen as attainable, but also result in an adverse variance if it is too difficult to achieve
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14
Q

What is top-down budgeting (non-participative)?

A
  • Imposed on budget holder by senior managers
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15
Q

What is bottom-up budgeting (participative)?

A
  • Divisional managers set the budget
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16
Q

What are some adv of top-down budgeting?

A
  • avoids dysfunctional behavior
  • quick
  • senior managers understand the needs of the whole organisation
  • avoids budgetary slack
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17
Q

What are some adv of bottom-up budgeting?

A
  • more realistic budgets
  • improved motivation/morale
  • buy-in from budget holder
  • frees up senior managers’ time
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18
Q

What is an incremental budget?

A
  • starts with the previous period’s budget or actual results and adjusts these by an incremental amount to cover inflation or other expected changes
19
Q

What is a ZBB?

A
  • each element of the budget is justified as if the activity to which the budget relates is being undertaken for the first time
20
Q

What are the stages of ZBB?

A
  1. Managers identify activities that can be individually evaluated
  2. The costs and benefits of each activity are included in a decision package
  3. The activities are ranked
  4. Resources allocated to various packages
21
Q

What kind of business is an incremental budget suitable for?

A
  • Stable business
  • good cost control
  • limited discretionary costs
22
Q

What kind of business is an ZBB suitable for?

A
  • Fast moving business
  • Historic figures inaccurate
  • high discretionary costs e.g., R&D, advertising
  • Public sector
23
Q

What are some adv of incremental budgeting?

A
  • Quick, low cost and easy
  • fine if historic figures accurate
  • managers not demotivated by changing targets
24
Q

What are some adv of ZBB?

A
  • better resource allocation
  • responds to changes in business environment
  • involvement of managers improves knowledge and motivation
25
Q

What is a rolling budget?

A
  • the budget is kept continuously up to date by adding another accounting period (e.g., month, quarter) when the earliest AP has expired
26
Q

What kind of business is a rolling budget suitable for?

A
  • fast moving
  • new
  • any that needs cost control
27
Q

What are some advs of a rolling budget?

A
  • budgeting and control should be more accurate
  • Managers keep budgets up to date
  • reduced uncertainty
28
Q

What is the aim of absorption costing?

A

to calculate the full production cost per unit

29
Q

What does absorption costing assume?

A

production overheads are driven by the level of activity

30
Q

What is the aim of activity-based costing (ABC)?

A

as per AC, i.e., to calculate the full production cost per unit

31
Q

What does ABC recognize?

A

the diversity and complexity of modern production meaning that not all production overheads are driven by the level of activity

32
Q

What are the steps to ABC costing?

A
  1. Group production o/h into activities (cost pools), according to how they are driven
  2. Identify cost drivers for each activity
  3. calculate an o/h absorption rate (OAR) for each activity
  4. Absorb activity costs into products
  5. calculate full production cost/unit and profit/loss
33
Q

What are some advs of ABC?

A
  • an understanding of what drives costs should improve cost control
  • more accurate cost per unit resulting in better pricing, cost control and decision making
34
Q

What are some dis adv of ABC?

A
  • Cost and time involved
  • Limited benefit if production o/hs are minimal or mainly driven by level of production
  • difficult to identify cost pools and drivers
35
Q

A change in budgetary system could bring what?

A

improved planning, control, and decision making

36
Q

Before a change in budgetary planning is made, what should be considered?

A
  • are suitably trained staff available?
  • will changing take up too much time?
  • staff trained in new system
  • all costs of system chnage
37
Q

What is a spreadsheet?

A

a computer package which stores data in a matrix format where the intersection of each row and column is referred to as a cell

38
Q

What are some advs of spreadsheets?

A
  • large enough to include a large volume of info
  • formulae and look up tables can be used
  • results can be printed
  • most programs can also represent the results graphically
39
Q

What are some dis adv of spreadsheets?

A
  • take time to develop
  • data can be accidentally changed
  • errors in design
  • security
40
Q

What is beyond budgeting?

A

the idea that companies need to move beyond budgeting because of inherent flaws in budgeting, especially when used to set incentive contracts

41
Q

What are the 6 main principles of Beyond budgeting?

A
  • business should have clear principles
  • managers should be given goals and targets based on relative success
  • managers should be given a high degree of freedom to make decisions
  • responsibility for decisions that generate value should be placed with front line terms
  • front line teams made responsible for relationships with customers
  • information support systems should be transparent and ethical
42
Q

What are some benefits of BB?

A
  • faster response time
  • better innovation
  • lower costs
  • improved customer and supplier loyalty
43
Q

What are the approaches for ethics and sustainability when budgeting?

A
  • environmental management accounting
  • triple bottom line reporting
  • full cost accounting
44
Q

What is full cost accounting?

A

attempts to include all the costs of an action, decision or manufacture of a product into a costing system.

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