Chapter 6 Flashcards
Incremental budgeting
Where is the budget for the forthcoming period is calculated by taking the current period and adding on a amount to account for anticipated, inflation and growth
Advantages of incremental budgeting
The budget is stable and changes gradual.
The system is relatively simple to operate and easy to understand.
Coordination between budgets is easier to achieve.
Disadvantage of incremental budgeting
Assumes activities and methods of working will continue in the same way.
The budget may become out of date, and no longer relate to level of activity or type of work being carried out.
Yeah, maybe Bush Terry slack built into the budget which is never reviewed
Rolling budgets
Repaired more frequently than single budgets.
If you’re prepared, everyone three or six months and each budget covers the next 12 month period.
Advantages of rolling budgets
The limit uncertainty by being able to update quickly as new information becomes available
Managers are forced to regularly reassess the assumptions they make
Planning and control decisions will be based on a plan that has been prepared recently
Disadvantages of rolling budgets
Greater time and expenses needed on the budgeting process as more budgets are being prepared.
Managers may feel that the benefits of rolling budgets are limited, particularly if the assumption behind the budgets do not change very much overtime. 
Zero-based budgeting
How much is the start signal every period and requires Manchester, justify every item of expenditure, even if the item has been accepted in previous periods
Every item that needs to be budgeted for is established as a decision package.
Each decision package is reviewed and ranked based on the benefits/importance to the organisation
Resources are there in allocated to the items in ranking order until all available resources are used up.
Advantages of zero-based budgeting
Results in efficient allocation of resources as it is based on needs and benefits.
Increase the staff motivation by providing great initiative and responsibility in decision-making
Identifies in the laminate waste and obsolete operations.
Disadvantage of zero-based budgeting
Difficult to define decision the units and decision packages as this is very time-consuming and exhaustive.
Force to justify every detail related to expenditure – e.g. RND department
Necessary to train managers. ZBB should be clearly understood by all.
Difficult to administer and communicate because more managers are involved in the process.
Activity based budgeting
A method of budgeting based on an activity framework and utilising cost driver data in the budget setting and variance feedback process
Advantages of activity based costing
Focuses on true drivers behind costs within an organisation
Will enable more efficient improvement programs to be implemented, because it considers the whole of a cost generating activity rather than just the cost itself
Disadvantages of activity based budgeting
Time consuming and resource intensive
Concept is not as readily understood by managers within an organisation
Challenges of budgeting for multinational companies
Budget target set in the home country currency may fluctuate when converted to another currency
Performance results in foreign subsidiaries may be affected by changes in exchange rates
Local regulations and political restrictions affecting choices made when budgeting
Differences in what customers want in different markets, resulting in additional local costs as products have to be adapted
Different local competitive environments, impacting upon decisions affecting budgeting 
Budget to use for control purposes
Steps involved
Step, one -bbudget is prepared based on defined, corporate objectives
Step two – actual results are established during the budget period
Set three – action is taken following the variance investigation
Step four – new revised objectives are set.
Return to step one.
Controllable cost
A cost, which can be controlled, typically by a cost, profit or investment centre manager