Lecture 8b Flashcards
Benefits and functions of budgeting
Planning
Responsibility
Integration, Coordination, and Communication
Motivation
Evaluation and Control
Incremental Budgeting
- Traditional budgeting usually starts with the previous years budgets and adds or subtracts amounts depending on output or other factors
- This is known as incremental budgeting
- Rolls forward last years
- Using incremental changes for inflation, price and cost movements
Incremental Budgeting Advantages
- Quick and simple to understand
- Appropriate for a stable environment
Incremental Budgeting Disadvantages
1.Out of date if environment is changing
2.Allows budgetary slack to be rolled forward
3.Costs not necessary for appropriate use
What are rolling budgets
- Like incremental but every period learns from last period changes
- Adjusts the future months for revised changes
- Adds another period on.
Methods of Budgets: Zero Based Budgeting (ZBB)
- Starts from a premise that expenditure will be zero
- All expenditures must be justified
- Puts together a decision package; requesting resources needed in a cost-benefit evaluation
- Focuses on programs or activities
- Ranks each application for resources and judges what is important
ZBB advantages
Removes slack and uses budgetary spend for exactly what is needed
ZBB Disadvantages
- Expensive and timely
- Not appropriate for stable environment
- Relies on judgement and training
What is beyond Budgeting
The Beyond Budgeting concept suggests that companies should replace traditional budgeting due to its flaws. Alternative techniques like rolling forecasts and market-related targets are proposed to provide more flexibility and relevance in planning and performance management.
Reported Advantages
o It is a more adaptive process than traditional budgeting.
o It is a decentralised process, unlike traditional budgeting where leaders plan and control organisations centrally.
Reported Drawbacks
o Without a budget, there is no overall framework of control which allows companies to plan, co-ordinate and control their activities.
o There is a lack of a road map which details where a business is and where it wants to go.
o Budgets may be very deeply ingrained in an organisation’s fabric and operating culture.
Parallel budgeting
In each approach the person responsible for each step in the process, the importance of that step and the time taken will be different
* The process can take up to 9 months!
The infrastructure used in Budgeting
Computerized budgeting
- We used standalone spreadsheets to generate simple budgets
- Spreadsheets can be used to automate some budgeting calculations
- Businesses can also use them to find out what happens if parameters change (scenario analysis)
Computerized budgeting drawbacks
- Spreadsheets take time and effort and are error-prone
- Data is not transferred automatically to or from accounting systems
- They may use convoluted or opaque ,so users don’t trust the output
- The categories used by the budget holder don’t always correspond exactly with the the chart of accounts.
What is a cash budget
Shows the budgeted cash flows in and out of the business for the budgeted period.
