Lecture 8- Budgeting

Question 1

What is a budget?

Answer 1

A budget is a financial plan covering the whole enterprise over a specified period of time and accounts for all the enterprises resources. It aims to allocate those resources in the most beneficial manner.

Question 2

What is the incremental approach to budgeting?

Answer 2

Still common in public sector. Does not encourage value-adding activities. Simple approach; cash-limit driven.

Question 3

What is the top-down approach to budgeting?

Answer 3

Dictatorial style; common in the smaller business; discourages initiative and depends on the top managers skill

Question 4

What is the bottom-up budgeting approach?

Answer 4

Recommended- allows initiate and responsibility to be shared. Everything is filtered up through the business.

Question 5

Why do we produce budgets?

Answer 5

• planning
• co-ordination
• Communication
• Motivation
• Control
• Evaluation

Question 6

What is a major reason for budgeting?

Answer 6

Co-ordination is a major reason for budgeting. In a large organization, it is essential to co-ordinate activities for the benefit of the organization as a whole.

Question 7

What are examples that prove the importance of co-ordination and budgeting?

Answer 7

• no point in sales manager drafting budget if there isn’t enough stock to sell
• no point in budgeting for production if factors of production are not available
• budgets therefore demand discussion between departments

Question 8

Why is communication important for budgeting?

Answer 8

• Top management uses the budget to communicate its strategic objectives for the budget period
• Junior managers communicate and agree on certain budget targets and allocations with senior managers

Question 9

Why is budgeting important for motivation?

Answer 9

• People perform better if they have a target to aim at

- The benefit of a target is increased where people have a say in it

Question 10

How does budgeting help to control the business?

Answer 10

• The budget is an integral part of the control system

- managers can trace what belongs to an organization and the use to which it is put

Question 11

How does budgeting help to evaluate? What

Answer 11

-Establishing a target allows us to compare actual performance with the budget

Question 12

What is the 8 stage process of budgeting?

Answer 12

1) Communication via the budget manual
2) identifying the key limiting factor
3) preparation of the initial budget
4) initial preparation of functional budgets
5) negotiation of budgets
6) co-ordination and review of budgets
7) final acceptance
8) ongoing review of budget in place

Question 13

What is the key limiting factor?

Answer 13

• also known as the budget factor
• the single issue for which is responsible for limiting the activity of the firm
• mostly sales in profit-seeking businesses
• usually cash in public sector organizations

Question 14

What are external variables in the first budget?

Answer 14

• customer demand
• competitor activity
• general economic conditions

Question 15

Who should prepare the first budget?

Answer 15

The most junior level of management as they know their own sector better than anyone else

Question 16

What is the budget committee?

Answer 16

The budget committee oversee the budget planning process and ratify individual functional budgets, eg production function, sales function, marketing function, etc.
Appoint a budget officer, normally senior accounting personnel

Question 17

How often should the budget be reviewed?

Answer 17

Weekly basis for about 6-8 week time horizons

Question 18

What is the zero base budgeting method?

Answer 18

• big contrast to common incremental approach
• very good at cutting excess cost
• very expensive and time consuming
• requires high level negotiating skills