Chapter 3 - Budgetary control systems Flashcards
Budget committee
Is a committee of senior executives who oversee the preparation of budgets
Budget accountant
Is an accountant who helps the budget committee in the preparation of budgets
Budget manual
Is a set of instructions detailing how the budget is to be prepared
Budget holder
Is a member of staff, usually a manager, who is responsible for the budget for a particular area of the business
Top-down budgeting
Is a budgeting system in which the budget is set and imposed by senior management
Bottom-up budgeting
Is a budgeting system in which managers have a degree of input into the budget
Budgetary slack
Is an extra amount of cost built into a budget by budget holders in order to make the targets easier to meet
Goal congruence
Is where the goals of individual functions or departments are consistent with the overall goals and strategy of the business
Incremental budgeting
Is a method of budgeting whereby the previous budget is adjusted for changes in prices and activity levels.
Top-down budgeting - PRO’S
- 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
Top-down budgeting - CON’S
- 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
Bottom-down budgeting - PRO’S
- 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
Bottom-down budgeting - CON’S
- 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
Incremental budgeting - PRO’S
- 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
Incremental budgeting - CON’S
- 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- Budgets may become out of date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.
Zero based budgeting
Is a method of budgeting whereby the budget for each cost center is looked at from scratch for each period
Zero based budgeting - PRO’S
- 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
Zero based budgeting - CON’S
-It’s time consuming, complex and costly
Programme based budgeting
Is a method of budgeting whereby the work of the business is split into programmes which are designed to achieve the business objectives
Activity based budgeting
Is a method of setting the budget based on the usage of cost drivers throughout the business
Activity based budgeting - PRO’S
- 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
Activity based budgeting - CON’S
- 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
Rolling budgets
Are budgets that are continually updated in order to project a continual amount of time into the future
