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
