Chapter 3 - Budgetary control systems

Question 1

Budget committee

Answer 1

Is a committee of senior executives who oversee the preparation of budgets

Question 2

Budget accountant

Answer 2

Is an accountant who helps the budget committee in the preparation of budgets

Question 3

Budget manual

Answer 3

Is a set of instructions detailing how the budget is to be prepared

Question 4

Budget holder

Answer 4

Is a member of staff, usually a manager, who is responsible for the budget for a particular area of the business

Question 5

Top-down budgeting

Answer 5

Is a budgeting system in which the budget is set and imposed by senior management

Question 6

Bottom-up budgeting

Answer 6

Is a budgeting system in which managers have a degree of input into the budget

Question 7

Budgetary slack

Answer 7

Is an extra amount of cost built into a budget by budget holders in order to make the targets easier to meet

Question 8

Goal congruence

Answer 8

Is where the goals of individual functions or departments are consistent with the overall goals and strategy of the business

Question 9

Incremental budgeting

Answer 9

Is a method of budgeting whereby the previous budget is adjusted for changes in prices and activity levels.

Question 10

Top-down budgeting - PRO’S

Answer 10

• Senior management will incorporate the strategic plans into all of the budgets
• All budgets will be in sync
• Budget should be produced more quickly
• Senior management have an overview of all resources of the business

Question 11

Top-down budgeting - CON’S

Answer 11

• Managers may become demotivated as the budget has been set by someone else
• Managers/juniors knowledge is not included / ignored
• Managers may resent other departments for being allocated a greater share of the budget

Question 12

Bottom-down budgeting - PRO’S

Answer 12

• Budget is based on the knowledge of managers
• Good motivation for the managers as they have set the achievable but challenging budget
• Managers commitment to the strategic plans of the company should be increased

Question 13

Bottom-down budgeting - CON’S

Answer 13

• Budget process will take more time and involve more people
• Lack of co-ordination between resource budgets that must be corrected
• Managers may introduce budgetary slack to ensure the actual results V budget results are favourable

Question 14

Incremental budgeting - PRO’S

Answer 14

• Fairly simple procedure that will not require too much management time
• Budget is stable and changes are gradual
• Co-ordination of budgets is made easier

Question 15

Incremental budgeting - CON’S

Answer 15

• Any inefficiencies in the original budget are repeated each period.
• No incentive to reduce costs or develop new ideas
• Budgets may become out of date
• Budgetary slack may be built into the budget, meaning it’s easier for managers to meet.

Question 16

Zero based budgeting

Answer 16

Is a method of budgeting whereby the budget for each cost center is looked at from scratch for each period

Question 17

Zero based budgeting - PRO’S

Answer 17

• Challenges existing operations and forces a business to examine alternative activities and existing expenditure levels.
• Any budgetary slack is not automatically included within the next period
• Inefficient practices can be removed
• Cost effectiveness are constantly monitored

Question 18

Zero based budgeting - CON’S

Answer 18

-It’s time consuming, complex and costly

Question 19

Programme based budgeting

Answer 19

Is a method of budgeting whereby the work of the business is split into programmes which are designed to achieve the business objectives

Question 20

Activity based budgeting

Answer 20

Is a method of setting the budget based on the usage of cost drivers throughout the business

Question 21

Activity based budgeting - PRO’S

Answer 21

• It attempts to provide meaningful product costs
• Recognises that many overhead costs arise out of the diversity and complexity of operations
• It facilitates a good understanding of what drives overhead costs, so they can be better managed

Question 22

Activity based budgeting - CON’S

Answer 22

• Time involved in identifying activities and drivers may be significant
• The ability of a single cost driver to explain fully the cost behavior of all items in its associated pool is questionable
• Some costs may not be able to relate to production output e.g. the cost of the annual external audit

Question 23

Rolling budgets

Answer 23

Are budgets that are continually updated in order to project a continual amount of time into the future