Introduction to Budgeting

Question 1

What are the Stages of the Process of a Business making a decision?

Answer 1

1. Mission Statement
2. Corporate Objectives
3. Corporate Strategy
4. Business Plan
   ANNUAL BUDGETING REPORT
5. Annual Budget (Mid-Term)
6. Monitor actual results
7. Responds to changes in plans

Question 2

What is Budgeting?

Answer 2

• Medium Term plans that management has to follow to meet a performance target
• Only looking one year ahead, so can be more precise and detailed (i.e. Monthly)

Question 3

How does Budgeting and Forecasting link?

Answer 3

• Forecasts are predictions on what the future may hold
• Budgeting should be based on the forecasts

Question 4

What are the cycles of events for Budgeting?

Answer 4

1. Formulate Plans
2. Monitor/Measures progress
3. Compare progress to performance (VARIANCE ANALYSIS; ascertain causes of divergence from plan)
4. Take action
5. Restatement or Plan in Change

Question 5

Why do firms Budget?

Answer 5

• Planning: Management forced to look ahead and set manageable targets
• Control: Measures performance and action can be taken
• Communication: Senior managers and budgets set expectations for areas
• Coordination: Master Budget to sub budget; works towards overall GOAL CONGREGATION
• Motivation: Drive to achieve goals and punishment if not
• Evaluation: Checking whether the target had been achieved; If the process was positive or negative

Question 6

What are the Advantages of Budgetary Controls?

Answer 6

• Clear Areas of Managerial Responses
• Clear timetable and programme
• Budgetary targets
• Variances are taken seriously
• Interactive process with high involvement by all management

Question 7

What are the Disadvantages of Budgetary Controls?

Answer 7

• Lack of Flexibility
• Dysfunctional motivational consequences
• Protects costs instead of lowering them
• Budget slack: Include easy targets
• Time-consuming on the information level
• Oversimplified budgets cannot be evaluated