Lecture 5 Flashcards
What are the 6 purposes of budgeting?
Planning. Control and evaluation. Co-ordination. Communication. Motivation. Authorisation.
What are 3 global issues that need to be considered in budgeting?
Legal frameworks. Political issues. Currency
What is a fixed budget?
A fixed budget set for a period, unchanged regardless of actual activity
3 Advantages of Fixed Budgets
Predictable, simple, clear spending limits
3 Disadvantages of Fixed Budgets
Inflexible, may not meet evolving business needs, unresponsive to unexpected changes
1 Behavioural issues that may come up when using a fixed budget.
Promotes a ‘use it or lose it’ attitude. Results in aimless spending near the period end
What is a Flexible Budget?
A flexible budget adjusts based on activity volume or other relevant factors
Advantage of using a flexible budget
Adjusts to change; enables evaluations by comparing actual and expected performance
Disadvantage of using a flexible budget
Complexity in detailed forecasting
2 Behavioural issues that may arise when using a flexible budget.
Risks over-analysis. Potential short-term focus over long-term goals
What is a Rolling Budget?
A rolling budget is continually updated to add a new budget period as the most recent budget period is completed
3 advantages of using a rolling budget
Continuously updated forecasts. Promotes ongoing planning. Motivates staff with a realistic and forward-looking budget.
3 disadvantages of using a rolling budget
Needs frequent updates which is time consuming. Potentially higher preparation costs. Might demotivate due to repetitiveness.
2 Behavioural issues that may occur when using a Rolling Budget.
Constant changes might cause confusion if there is poor communication. Frequent changes may cause oversight in longer-term objectives.
What is an Incremental Budget?
Incremental Budget starts with the previous budget, applying slight adjustments for the next period.
3 Advantages of Incremental Budgets
Simple to grasp and apply. Needs less detail. Ideal for small businesses or firms in stable sectors.
2 Disadvantages of Incremental Budget
Complacency: can perpetuate inefficiencies. Lack of Innovation
2 Behavioural issues that may arise when using an Incremental Budget.
May promote wasteful spending. Overlooks activity-based cost drivers
What is a Zero Based Budget?
All functions of the budget to be set to zero and all expenses must be justified.
3 Advantages of Zero Base Budgets
Boost cost-awareness. Ensures alignment with company strategy. Adapts to evolving business landscapes
3 Disadvantages of Zero Base Budgeting
Demanding in terms of time. Could deter investment in long-term initiatives. Potentially draining for teams.
3 Behavioural issues that may occur when using Zero Base Budgeting
Increased stress and work load. Reluctance to constant validation. Possible tension between departments over budget allocation.
What is Activity-based budgeting?
An approach centred on cost-driving activities, aligning resources with strategic objectives.
2 Advantages to Activity-based budgeting
Transparency: Direct insight into activities and associated costs. Strategic Alignment: Ensures resource allocation matches strategic intentions
2 Disadvantages to Activity-based budgeting
Complex: Demands in-depth activity and cost analysis. Time-intensive: Requires thorough operational understanding
1 Behavioural issue that may occur when using Activity-based budgeting
Potential to overlook broader strategies.
3 Advantages for Beyond Budgeting
More innovative strategies. Lower costs. More loyal customers.
3 Disadvantages for Beyond Budgeting
Potential lack of control. Reliance on benchmarks. Resistance from management
