Chapter 11 - Budgeting

Question 1

What are the benefits of budgeting

Answer 1

Planning-how many materials or labour workers do we need (in essence budgeting means planning)

Coordination - insure it all works no points letting production make 5000 units of cells can only sell 4000 units

Control – we can keep control on spend by actualising each month

Authorising and delegating

Evaluation of performance-budgets are used as targets for management or revenue for Shagufta

Communication and motivating-revenue and sales ledger have a target to work towards

Question 2

What is the principal budget factor

Answer 2

The principal Budgick factor is where we start with the budgets and where we normally start with the budget is with what limits our growth. This is normally sales for example why are we not bigger than we are because we can’t sell as much as we want to sell perhaps. Therefore the sales budget is usually the first budget to be prepared and this leads on to the others. However it could be for example a limit on the availability of raw materials that limits activity in this case raw materials would be the principal budget factor and this would be the first budget to be prepared

Question 3

What are functional budgets

Answer 3

Functional budgets are the individual budgets that may at some point be consolidated into one. Four example what total labour hours do we need what total materials do we need what total production budget et cetera

Question 4

What are the types of budget

Answer 4

Fixed budget
- original budget prepared usually for the next year
- problem with it, it will go out of date quickly (e.g expecting to pay £10 on labour but next year inflation occurs and we need to raise salary) and because of this they do
1. Quarterly forecasts (updating the fixed budget)
2. Still remains overall budget, if something increases we look elsewhere to save money to offset

Flexed budget
- we rewrite the budget for the actual level of activity
- use it for control purchases to compare actual with flexed

Rolling budget
- budget every month for following 12 month and actualise as we go. For example we are dec so we do budget for jan - feb and then in jan we budget for feb to jan, keep rolling the 12 months
- advantages are that budget is always up to date and because it’s monthly it becomes part of normal work so less errors

Question 5

What are the methods for budgeting

Answer 5

Incremental budgeting
This approach is to take the previous years results and then to adjust them by an amount to cover inflation and any other known changes. For example if we were budgeting for a phone bill we would adjust the current years budget to reflect changes in costs or usage next year.

Zero-based budgeting
Zero-base budgeting we do not consider the previous period instead we consider each activity on its own merits. Although this approach is in principle a much better approach for budgeting because we are encouraged not to continue on previous problems in efficiencies it is time-consuming and also requires much more expertise. For example if we are budgeting on the phone bill we would look at all options and pick from there for example telephone or mobile or Skype and see which is the best option.

Zero-based budgeting is a lot more time-consuming what companies tend to do is to 0-based for most important areas to review for that year and do increment for everything else

Question 6

What is beyond budgeting

Answer 6

Beyond budgeting approach whereby instead of pairing a budget and measuring the performance of managers by reference to the budget managers are measured by comparison with other similar companies or by the comparison with other similar divisions of the same company

However there has been much recent criticism of the annual budget process for many reasons including

Time-consuming and costly to put together
Restricts responsiveness and miss the flexibility as it is a barrier to change
Rarely strategically focused
As little value
Concentrates on cost reduction not increasing value
Encourages deeming and divisive behaviour to meet the budget
Not up to dates often enough
Based on assumptions estimates and guesses
Reinforces the part of mental barriers rather than sharing and cooperation
Makes people feel undervalued the budget is seen as a strict control mechanism and employees have to stick to the budget no matter what