Chapter 2 Budgeting

Question 1

Budget

Answer 1

Financial, quantitative plan
Intent for forthcoming period

Question 2

PRIME Purposes of Budgeting

Answer 2

Planning
Responsibility
Integration
Motivation
Evaluation and control

Question 3

Planning

Answer 3

Forces managers to look to future
Deliver targeted performance for shareholders

Question 4

Responsibility

Answer 4

Identifies the manager in charge
The budget holder

Question 5

Integration

Answer 5

Communication and coordination between departments

Question 6

Motivation

Answer 6

Motivate staff by setting targets to achieve
Must be challenging but achievable

Question 7

Evaluation and control

Answer 7

Evaluation of actual results compared to budgets

Question 8

Budgeting Process

Answer 8

Establish budget period
Issue the budget manual
Appoint budget committee
Identify budget coordinator
Budget holder draws budget for their department

Question 9

Budget cycle

Answer 9

Set overall objectives
Managers will prepare budget
Departments will operate
Compare actual results with budget

Question 10

Top down approach

Answer 10

Senior level management setting the budget

Question 11

Top down approach advantages

Answer 11

Best use of resources
Operational managers may lack skill
Senior managers greater control
Senior managers better at overall corporate objectives

Question 12

Top down approach disadvantages

Answer 12

Senior management lack local knowledge
Targets set may be unrealistic
Poor use of senior management time
De motivating staff expected to achieve imposed targets

Question 13

Bottom up budgeting

Answer 13

Each department setting its own budgets

Question 14

Bottom up advantages

Answer 14

Operational management have local knowledge
More realistic and achievable targets
Free up senior manager time
More motivating for staff involved
Build up skill for lower managers

Question 15

Bottom up disadvantages

Answer 15

Very time consuming
Operational managers may lack skill
Too many conflicting views
Make targets too easy
Lack consistency between departments

Question 16

Incremental Budgeting

Answer 16

Forthcoming period adjusted for anticipated changes next year

Question 17

Incremental budgeting advantages

Answer 17

Budget is stable. Changes are gradual
Simple to do
Coordination is easier between departments

Question 18

Incremental disadvantages

Answer 18

Assumes activities continue the same way
No incentive to reduce costs
Encourages spend of full amount

Question 19

Zero based budgeting

Answer 19

Start from ground zero every year
Justify everything

Question 20

Zero based advantages

Answer 20

More efficient allocation of resources
Drives managers to improve costs
Increase staff motivation

Question 21

Zero based disadvantages

Answer 21

Time consuming
Managers demotivated to justify
Need training managers
Difficult to administer with so many more managers innvolved

Question 22

Rolling budgets

Answer 22

Amending budgets each month
Developing circumstances

Question 23

Rolling budgets advantages

Answer 23

More up to date budget
No unexpected surprises
Encouraged staff engagement

Question 24

Rolling budget’s disadvantages

Answer 24

A lot of time and effort
De motivation if people unsure what they are aiming for
Which budget to compare at end of year

Question 25

Activity based budgeting

Answer 25

Identify the causes of costs and within organisation

Question 26

Activity based advantages

Answer 26

Focuses management on true drivers behind costs
Budgets more likely to be accurate
More efficient improvement programmes

Question 27

Activity based disadvantages

Answer 27

Time consuming
Resource intensive
Not easily understood

Question 28

Priority based budgeting

Answer 28

Modification of zero based
Focuses on organisational priorities
Essential/desirable/beneficial

Question 29

Contingency based budgeting

Answer 29

Plan and budget for unexpected financial problems
Money on reserve as insurance

Question 30

Contingency based advantages

Answer 30

Additional resources readily available
Fairer appraisal if uncertainties play out

Question 31

Contingency based disadvantages

Answer 31

Budgetary slack, encouragement to spend everything budgeted for
Straining resources business needs enough to do this