Lecture 5

Question 1

What are the 6 purposes of budgeting?

Answer 1

Planning. Control and evaluation. Co-ordination. Communication. Motivation. Authorisation.

Question 2

What are 3 global issues that need to be considered in budgeting?

Answer 2

Legal frameworks. Political issues. Currency

Question 3

What is a fixed budget?

Answer 3

A fixed budget set for a period, unchanged regardless of actual activity

Question 4

3 Advantages of Fixed Budgets

Answer 4

Predictable, simple, clear spending limits

Question 5

3 Disadvantages of Fixed Budgets

Answer 5

Inflexible, may not meet evolving business needs, unresponsive to unexpected changes

Question 6

1 Behavioural issues that may come up when using a fixed budget.

Answer 6

Promotes a ‘use it or lose it’ attitude. Results in aimless spending near the period end

Question 7

What is a Flexible Budget?

Answer 7

A flexible budget adjusts based on activity volume or other relevant factors

Question 8

Advantage of using a flexible budget

Answer 8

Adjusts to change; enables evaluations by comparing actual and expected performance

Question 9

Disadvantage of using a flexible budget

Answer 9

Complexity in detailed forecasting

Question 10

2 Behavioural issues that may arise when using a flexible budget.

Answer 10

Risks over-analysis. Potential short-term focus over long-term goals

Question 11

What is a Rolling Budget?

Answer 11

A rolling budget is continually updated to add a new budget period as the most recent budget period is completed

Question 12

3 advantages of using a rolling budget

Answer 12

Continuously updated forecasts. Promotes ongoing planning. Motivates staff with a realistic and forward-looking budget.

Question 13

3 disadvantages of using a rolling budget

Answer 13

Needs frequent updates which is time consuming. Potentially higher preparation costs. Might demotivate due to repetitiveness.

Question 14

2 Behavioural issues that may occur when using a Rolling Budget.

Answer 14

Constant changes might cause confusion if there is poor communication. Frequent changes may cause oversight in longer-term objectives.

Question 15

What is an Incremental Budget?

Answer 15

Incremental Budget starts with the previous budget, applying slight adjustments for the next period.

Question 16

3 Advantages of Incremental Budgets

Answer 16

Simple to grasp and apply. Needs less detail. Ideal for small businesses or firms in stable sectors.

Question 17

2 Disadvantages of Incremental Budget

Answer 17

Complacency: can perpetuate inefficiencies. Lack of Innovation

Question 18

2 Behavioural issues that may arise when using an Incremental Budget.

Answer 18

May promote wasteful spending. Overlooks activity-based cost drivers

Question 19

What is a Zero Based Budget?

Answer 19

All functions of the budget to be set to zero and all expenses must be justified.

Question 20

3 Advantages of Zero Base Budgets

Answer 20

Boost cost-awareness. Ensures alignment with company strategy. Adapts to evolving business landscapes

Question 21

3 Disadvantages of Zero Base Budgeting

Answer 21

Demanding in terms of time. Could deter investment in long-term initiatives. Potentially draining for teams.

Question 22

3 Behavioural issues that may occur when using Zero Base Budgeting

Answer 22

Increased stress and work load. Reluctance to constant validation. Possible tension between departments over budget allocation.

Question 23

What is Activity-based budgeting?

Answer 23

An approach centred on cost-driving activities, aligning resources with strategic objectives.

Question 24

2 Advantages to Activity-based budgeting

Answer 24

Transparency: Direct insight into activities and associated costs. Strategic Alignment: Ensures resource allocation matches strategic intentions

Question 25

2 Disadvantages to Activity-based budgeting

Answer 25

Complex: Demands in-depth activity and cost analysis. Time-intensive: Requires thorough operational understanding

Question 26

1 Behavioural issue that may occur when using Activity-based budgeting

Answer 26

Potential to overlook broader strategies.

Question 27

3 Advantages for Beyond Budgeting

Answer 27

More innovative strategies. Lower costs. More loyal customers.

Question 28

3 Disadvantages for Beyond Budgeting

Answer 28

Potential lack of control. Reliance on benchmarks. Resistance from management