Chapter 3 Flashcards
acronym for purpose of budgets
Planning Responsibility Integration Motivation Evaluation
benefits of planning
you need to plan how to hit targets to ensure strategic plan is met
benefits of responsibility
budgets specify which managers are in control of specific revenue streams - key for motivation
benefits of integration
ensures plans do not conflict each other
benefits of motivation
if management are involved in setting targets theyll be more likely to meet them
benefits of evaluation
trends in performance can be evaluated and variances investigated
what is top down budgeting
done by senior management
what is bottom up budgeting
local managers prepare their own budgets
5 types of budgeting
incremental zero based rolling flexible activity based
advs of incremental budgeting
based on current performance, flexed to actual activity levels
disadvs of incremental budgeting
encourages slack
does not consider alternative ways to improve performance
advs of ZBB
responds to changes in business environment
requires the business to monitor costs very closely
disadv’s of ZBB
requires a lot of management time and effort
requires a participative approach so could be inappropriate depending on culture
questioning of current practises could be threatening
Adv’s of rolling budgets
reduces the uncertainty associated with budgeting as its easier to predict short term figures
likely to be more realistic than an annual budget
disadvs of rolling
requires time, effort and money to keep updating
constantly changing targets can be demotivating
adv’s of flexible budgets
highlights costs of unused capacity
disadv’s of flexible budgets
if there is a high level of stability, effort involved produces little extra benefit
advs of activity based budgets
recognises that activity drives cost so encourages focus on managing cost drivers
disadv’s of activity based budgets
requires a lot of time and effort to prepare so only suited to companies with multiple cost drivers
what is a planning variance
variances caused by problems in the budget - not operational managers fault
what is a operational variance
variances caused by difference in actual performance and revised budget
when should a budget be revised
for items that are beyond the control of the business
advs of revising a budget
realistic targets
helps to improve accuracy of future budgets
highlights controllable and non controllable variables
disadvs of revising a budget
undermines original as a target
may be biased and manipulated
