Chapter 10 - Budgeting Flashcards
What is a budget?
A quantitative plan prepared for a specific time period.
What are the purposes of a budget?
Planning
Responsibility
Integration
Motivation
Evaluation
What do budgets contribute towards?
performance management by providing benchmarks against which to compare actual results (through variance analysis), and develop corrective measures
Budgets take many forms and serve many functions, but most provide the basis for what?
Detailed sales targets
Staffing plans
Production
Cash investment and borrowing
Capital expenditure
What does strategic planning look at?
the whole organisation and defines resource requirements e.g., development of new products
What does tactical planning look at?
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
What does organizational planning look at?
concerned with control. budget is set for the new product to include advertising expenditure, sales forecasts, labour
What are the different management styles?
- Budget constrained style
- Profit conscious style
- Non-accounting style
What is a budget-constrained style?
- 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
What is a profit conscious style?
- 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
What is a non-accounting style?
- 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
What is a expectations budget?
- A budget set at current achievable levels.
- Unlikely to motivate managers to improve but may give more accurate forecast
What is a aspirations budget?
- 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
What is top-down budgeting (non-participative)?
- Imposed on budget holder by senior managers
What is bottom-up budgeting (participative)?
- Divisional managers set the budget
What are some adv of top-down budgeting?
- avoids dysfunctional behavior
- quick
- senior managers understand the needs of the whole organisation
- avoids budgetary slack
What are some adv of bottom-up budgeting?
- more realistic budgets
- improved motivation/morale
- buy-in from budget holder
- frees up senior managers’ time
What is an incremental budget?
- starts with the previous period’s budget or actual results and adjusts these by an incremental amount to cover inflation or other expected changes
What is a ZBB?
- each element of the budget is justified as if the activity to which the budget relates is being undertaken for the first time
What are the stages of ZBB?
- Managers identify activities that can be individually evaluated
- The costs and benefits of each activity are included in a decision package
- The activities are ranked
- Resources allocated to various packages
What kind of business is an incremental budget suitable for?
- Stable business
- good cost control
- limited discretionary costs
What kind of business is an ZBB suitable for?
- Fast moving business
- Historic figures inaccurate
- high discretionary costs e.g., R&D, advertising
- Public sector
What are some adv of incremental budgeting?
- Quick, low cost and easy
- fine if historic figures accurate
- managers not demotivated by changing targets
What are some adv of ZBB?
- better resource allocation
- responds to changes in business environment
- involvement of managers improves knowledge and motivation
What is a rolling budget?
- the budget is kept continuously up to date by adding another accounting period (e.g., month, quarter) when the earliest AP has expired
What kind of business is a rolling budget suitable for?
- fast moving
- new
- any that needs cost control
What are some advs of a rolling budget?
- budgeting and control should be more accurate
- Managers keep budgets up to date
- reduced uncertainty
What is the aim of absorption costing?
to calculate the full production cost per unit
What does absorption costing assume?
production overheads are driven by the level of activity
What is the aim of activity-based costing (ABC)?
as per AC, i.e., to calculate the full production cost per unit
What does ABC recognize?
the diversity and complexity of modern production meaning that not all production overheads are driven by the level of activity
What are the steps to ABC costing?
- Group production o/h into activities (cost pools), according to how they are driven
- Identify cost drivers for each activity
- calculate an o/h absorption rate (OAR) for each activity
- Absorb activity costs into products
- calculate full production cost/unit and profit/loss
What are some advs of ABC?
- an understanding of what drives costs should improve cost control
- more accurate cost per unit resulting in better pricing, cost control and decision making
What are some dis adv of ABC?
- 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
A change in budgetary system could bring what?
improved planning, control, and decision making
Before a change in budgetary planning is made, what should be considered?
- are suitably trained staff available?
- will changing take up too much time?
- staff trained in new system
- all costs of system chnage
What is a spreadsheet?
a computer package which stores data in a matrix format where the intersection of each row and column is referred to as a cell
What are some advs of spreadsheets?
- 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
What are some dis adv of spreadsheets?
- take time to develop
- data can be accidentally changed
- errors in design
- security
What is beyond budgeting?
the idea that companies need to move beyond budgeting because of inherent flaws in budgeting, especially when used to set incentive contracts
What are the 6 main principles of Beyond budgeting?
- 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
What are some benefits of BB?
- faster response time
- better innovation
- lower costs
- improved customer and supplier loyalty
What are the approaches for ethics and sustainability when budgeting?
- environmental management accounting
- triple bottom line reporting
- full cost accounting
What is full cost accounting?
attempts to include all the costs of an action, decision or manufacture of a product into a costing system.
