Flexed Budgets

Question 1

What are Budgets?

Answer 1

Budgets are statements setting out the planned performance of a business typically in a table made up of numbers. Usually these plans deal with money units (£’s/pence) but they can also consist of other measurable units e.g. units of output. Creating a budget enables an functions–337.php]organisation (like Kraft) to plan ahead and then to check on its performance against budgeted figures.

Question 2

Budgeting: a cyclical planning process…

Answer 2

What do we think will happen (forecasts)
What do we intend to happen (aims, objectives)
How will we manage this (plans & budgets)
What did happen (actual performance)
What was the difference (variance analysis)
What have we learnt (investigating variances)
What do we think will happen (next round of planning)

Question 3

Describe the organisational levels of budgets?

Answer 3

Budgets can exist at all levels of the organisation.
Corporate - strategic. mid or long term, 3-5 years.
Operational - business unit annual or mid term 1-2 years.
Tactical - Unit or managerial daily monthly or quarterly

Question 4

What are the 3 organisational levels of budgets?

Answer 4

Corporate, operational, tactical

Question 5

Why is it important to understand budgets?

Answer 5

hey are the most likely accounting mechanism that you may be exposed to in for example your placement

Question 6

Objectives, plans and budgets

Answer 6

Identify business objectives, consider options, prepare a long-term plan based on the most appropriate option, prepare budget (short-term plan)

Question 7

What is the decision-making, planning and control process?

Answer 7

identify business objectives, consider options, prepare a long term plan based on the most appropriate option(s), prepare short term plans (budgets), perform and collect information on actual performance, respond and collect information on actual performance, respond to divergence and exercise control, revise plans and (budgets) if necessary

Question 8

What are the 4 areas of usefulness (budgets)?

Answer 8

Forward Planning
Co-ordination
Motivation
Control

Question 9

What does Periodic/Rolling mean?

Answer 9

budgets can be drawn up for a fixed period or continually updated

Question 10

What does periodic budget mean?

Answer 10

A budget prepared for a specific time period – specifically a year (which normally coincides with the financial year (or possibly an economic seasonal year) – essentially a one off exercise, changes are rare.
Emphasis monitoring

Question 11

What does Continual or Rolling Budget mean?

Answer 11

A continually updated budget (for example a 12 month budget with a new 12th month added each time
Emphasis planning

Question 12

What are the 9 Budget Setting Steps?

Answer 12

Establishing responsibility 
Communicating guidelines to relevant managers
Identify key or limiting factors
Prepare the budget for the limiting factor
Prepare other draft budgets
Review and Co-ordinate budgets
Prepare master budgets
Communicate budgets 
Monitor performance against budget

Question 13

What is step 1 of the budget setting steps

Answer 13

Establishing Responsibility
Due to the impact budgets have on the operation of a organisation there must be authority in the setting process
Senior officer responsible (often the chief financial officer) – the budget officer, possibly a budget committee

Question 14

What is step 2 of the budget setting steps?

Answer 14

Communicating guidelines to relevant managers
Establishing the ‘context’ within which budgets are drawn up – long term objectives, economic indicators, access to information

Question 15

What is step 3 of the budget setting steps?

Answer 15

dentify Key or Limiting Factors

Aspects that may stop ‘maximum’ achievement of budgets – availability of capacity (plant? labour? materials?); availability of funds

Question 16

What is step 4 of the budget setting steps?

Answer 16

Prepare the budget for the limiting factor

This is most often reflected through the Sales or Income budget, which in most circumstances is the first budget drawn up

Question 17

What is step 5 of the budget setting steps?

Answer 17

Prepare other draft budgets

Prepare all other relevant budgets – these are usually to some degree resultant on the limiting or prime budget setting (eg Sales budget)

Top Down – normal
Bottom Up – rare in practise

Question 18

What is step 6 of the budget setting steps?

Answer 18

Review and Co-ordinate Budgets

Ensure budgets ‘mesh’ and compliment each other – sort out anomalies and revisions – hopefully with diplomacy but if not AUTHORITY

Question 19

What is step 7 of the budget setting steps?

Answer 19

Prepare Master Budgets

For example P&L, Balance Sheet and Cash Flow Forecasts

Question 20

What is step 8 of the budget setting steps?

Answer 20

8. Communicate budgets

Pass ‘formally’ agreed budgets to interested parties, budget holders and those responsible for achieving targets

Question 21

What is step 9 of the budget setting steps?

Answer 21

Monitor Performance against Budget

Compare actual to budget ie the variance….
wow, phew or oops!

Question 22

What are the 3 budget setting approaches?

Answer 22

Incremental budgeting, zero based budgeting (VBB) and Activity based budgeting (AAB)

Question 23

What does incremental budgeting mean? budgeting approach

Answer 23

A traditional approach based on what has happened in the past with some adjustment for inflation or other influencing factors

Question 24

What does Zero based budgeting (ZBB) mean? budgeting approach

Answer 24

Underlying philosophy – all spending needs must be justified – ie no automatic allocation of any spending budget

Bids for funds, justification of need, demonstration of value for money

Question 25

What does Activity Based Budgeting (ABB) mean? budgeting approach

Answer 25

Taking the principle of activity based costing through to budgeting

Question 26

What are the 4 significant human behavior’s for the success of budgetary control?

Answer 26

Motivation
Participation
Levels of Performance
Control ability

Question 27

What does significance of human behavior for the success of budgetary control mean?

Answer 27

Budgetary control can only operate effectively if the people within the system are given adequate consideration

Question 28

Motivation - significance of human behavior for the success of budgetary control

Answer 28

goal congruence improves morale whereby managers are encouraged to strive for the success of the budget plan.

Question 29

Participation - significance of human behavior for the success of budgetary control

Answer 29

Managers who feel part of the budgeting process will more easily accept the compromises needed to co-ordinate various aspects of the business.

Question 30

Levels of Performance - significance of human behavior for the success of budgetary control

Answer 30

easonably attainable budgets are more likely to be accepted by those tasked to achieve them. Stress lowers morale and leads to dysfunctional behaviour

Question 31

Controllability - significance of human behavior for the success of budgetary control

Answer 31

esponsibility should be linked to authority and the ability to control outcomes. Reporting exemptions from the budget should promote remedial action not automatic blame.