Chapter 2 Budgeting Flashcards
Budget
Financial, quantitative plan
Intent for forthcoming period
PRIME Purposes of Budgeting
Planning
Responsibility
Integration
Motivation
Evaluation and control
Planning
Forces managers to look to future
Deliver targeted performance for shareholders
Responsibility
Identifies the manager in charge
The budget holder
Integration
Communication and coordination between departments
Motivation
Motivate staff by setting targets to achieve
Must be challenging but achievable
Evaluation and control
Evaluation of actual results compared to budgets
Budgeting Process
Establish budget period
Issue the budget manual
Appoint budget committee
Identify budget coordinator
Budget holder draws budget for their department
Budget cycle
Set overall objectives
Managers will prepare budget
Departments will operate
Compare actual results with budget
Top down approach
Senior level management setting the budget
Top down approach advantages
Best use of resources
Operational managers may lack skill
Senior managers greater control
Senior managers better at overall corporate objectives
Top down approach disadvantages
Senior management lack local knowledge
Targets set may be unrealistic
Poor use of senior management time
De motivating staff expected to achieve imposed targets
Bottom up budgeting
Each department setting its own budgets
Bottom up advantages
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
Bottom up disadvantages
Very time consuming
Operational managers may lack skill
Too many conflicting views
Make targets too easy
Lack consistency between departments
Incremental Budgeting
Forthcoming period adjusted for anticipated changes next year
Incremental budgeting advantages
Budget is stable. Changes are gradual
Simple to do
Coordination is easier between departments
Incremental disadvantages
Assumes activities continue the same way
No incentive to reduce costs
Encourages spend of full amount
Zero based budgeting
Start from ground zero every year
Justify everything
Zero based advantages
More efficient allocation of resources
Drives managers to improve costs
Increase staff motivation
Zero based disadvantages
Time consuming
Managers demotivated to justify
Need training managers
Difficult to administer with so many more managers innvolved
Rolling budgets
Amending budgets each month
Developing circumstances
Rolling budgets advantages
More up to date budget
No unexpected surprises
Encouraged staff engagement
Rolling budget’s disadvantages
A lot of time and effort
De motivation if people unsure what they are aiming for
Which budget to compare at end of year
