Lecture 6 (week 27)

Question 1

Criticisms of Budgets:

Answer 1

• Cannot deal with rapid change
• Focus on the short term
• Encourage a top down management style
• protect costs rather than reduce them
• Time consuming
• Based on traditional business functions

Question 2

Some behavioural considerations within the budget setting process…

Answer 2

• Managers may provide inaccurate figures which may include some slack within the budgets
• May demotivate managers
• May not take corrective action
• Result in goal in congruence and dysfunctional behaviours

Question 3

5 factors of good budgeting systems…

Answer 3

• consultation
• realistic targets
• education and training
• involvement and participation
• not used in disciplinary action

Question 4

Problems with traditional incremental budgeting…

Answer 4

• Incremental 12 months annual budget
• Uses last years figures with minor adjustments without reconsidering if costs are necessary

5 problems…
- reduce flexibility
- discourage savings
- discourage innovation
- result in missed opportunities
- perpetuate existing inefficiencies

Question 5

3 alternatives to traditional incremental budgeting

Answer 5

1) Rolling budget
2) Activity based budgeting
3) Zero based budgeting

Question 6

What is a Rolling budget?

Answer 6

The budget is divided into control periods for example quarters. Then at the end of each control period a comparison is made between the actual results and the budget forecasts. Based on this the budgets for the emailing control periods will be reviewed and revised if necessary.

The entire budget will be extended for a further control period

Question 7

Advantages of a Rolling budget…

Answer 7

• Planning and control functions are based on more accurate budgets
• May reduce uncertainty
• there is always a budget forecasts the next budget period
• encourages management to review, revise and extend on a regular and up to date basis.

Question 8

Disadvantages of a Rolling budget…

Answer 8

• costly
• Time consuming
• Focus may shift to the budgeting process rather than the control of actual processes
• May be demotivating if targets are changing all the time
• Version control can be an issue

Question 9

What is Activity based budgeting?

Answer 9

This should only be used if business is using ABC.
Focuses on activities of a business rather than physical departments
Based on the idea that costs are driven by activities within an organisation
Those activities add value to product or service
Popular in public sector organisations such as law enforcement

Question 10

What is Zero based budgeting?

Answer 10

The budget starts afresh, rather than being based on past historical financial data. Every activity is questioned and has to be justified.

Encourages forward thinking in terms of identifying certain resources which are needed and may lead to an increase in efficiency

Question 11

Beyond budgeting?

Answer 11

Moving away from traditional budgeting to improve control throughout a business.

The target setting process is based on external benchmarks
Motivate managers through delegation and giving them challenges
Greater inclusion and teamwork, so there is less bureaucracy

Question 13

Kaizen budgeting…

Answer 13

Can require a great deal of time, resources and planning. Looks at small incremental improvements, can be used to look at the performance of managers in terms of cost savings.