MA 1 Budgeting - Big Picture

Question 1

Common types of budgets

Answer 1

Master budget, which includes:

• operating budget
• financing
• cash flow
• budgeted financial statements

specific purpose, such as:

• project budget
• capital budget

Question 2

4 steps for creating budgets

Answer 2

1. identify constraints, potential issues and areas of uncertainty
2. gather info
3. make future predictions
4. implement and gather feedback

Question 3

budgets allow organizations to improve planning and enhance management control in 5 ways

Answer 3

• predict financial consequences of plans
• compare resource requirements with available resources
• allocate constrained resources to most profitable uses
• communicate financial and operating objectives
• assign responsibility and establish control

Question 4

Common form of budget manipulation

Answer 4

creating slack by underestimating revenues or oversetimating expenses, making results easier to achieve

Question 5

Reason for manipulation (3)

Answer 5

• portray company in better light, to obtain financing perhaps
• appease higher-level managers who have more aggressive goals
• make it easier to achieve performance evaluation targets

Question 6

Define traditional budgeting

+/-

Answer 6

org gets an assigned increase or decrease % across the board
\+ easy to do
\+ cost-efficient
- can allocate resources ineffectively
- can cut high performing departments

Question 7

Define static budgets

+/-

Answer 7

created based upon planned level of sales and/or production, and not adjusted if actual units or activity levels differ.
+ allow for high-level analysis
- not accurate when actual vs estimate is different

Question 8

Define flexible budgets

+/-

Answer 8

Flexible budgets adjusted automatically for actual level of activity
+ separates cost control from activity control

Question 9

Define priority budgeting

+/-

Answer 9

Resources allocated based upon their importance to the strategic plan
+ can effecitvely prioritize
- difficult to allocate sometimes

Question 10

Top-down vs participative budgets

Answer 10

Top-down - upper management sets budget

Participative - line managers take active role in shaping their budget

Question 11

Zero-based budgeting

+/-

Answer 11

All line items start at zero, and all expenses have to be justified
+ effective at weeding out slack
- very time-consuming and costly

Question 12

Activity-based budgeting

Answer 12

Each actitivty is analysed then a budgeted cost per unit of actitivy is used to develop costs y function / product / service.
+ more accurate
+ helps identify resource needs
+ links budgeted costs to activity levels

Question 13

Forecasting definition and use

Answer 13

process of predicting future financial and/or non-financial resutls based upon one or more sets of assumptions
used for strategic managements, operational planning, and budgeting