Module 16: Budgeting Techniques Flashcards
What are the 6 key areas that the use of a budget helps in the business?
Planning Communicating Co-ordinating Controlling Motivating Evaluating
Criticisms of Traditional Budgets?
Reliance on past data
Use of fixed percentage increases/decreases
Treating as independent of rest of organisation
Little room for movement
Only using at end to evaluate
Attribute blame for bad performance
Proposals for improving the effectiveness of budgeting?
Linking to strategy
Demonstrating top management support
Involving those responsible for achieving
Using as control tool
Remembering it is a human process
Balancing financial and non financial aspects
Human aspects of budgeting?
Human process, negotiated agreed and enforced
Problems- unpopular, seen as oppressive, limiting, threat, reducing resources
Solutions- education, be flexible, will not always be met, variance can direct attention not blame
What is budget padding?
Deliberate underestimate of future sales performance
And/or overestimate of future costs to create good appraisal
What is budgetary slack?
Amount added onto expected costs/revenue
What are possible effects of budget padding?
Inaccurate resources and/or higher production costs
Department budgets inaccurate
Extra income made by more sales could be lost out on
Cashflow planning will be affected
Difficulty in setting budget?
Behavioural impact- too difficult will give up, too easy might not try best
What is incremental budgeting?
Taking historic budgeted or actual figures and updating by an incremental amount each period
Advantages of incremental budgeting?
Simple, easy to apply
Non-threatening
All figures known, start wit prior year position
Discussions focus on marginal changes
Disadvantages of incremental budgeting?
Perpetuates past inefficiencies e.g. budgetary slack
‘Business as usual approach’
What is Zero Based Budgeting?
Every time budgeting process carried out every budget centre starts with zero allocation
Builds up budget proposals based on levels of service and activity
Each service level proposal subject to review by senior management
Requires to rank, explore alternatives and determine costs
More extensive work
Advantages of ZBB?
Resources allocated on need
Increased participation of employees in process
Focus on value for money
Disadvantages of ZBB?
Time consuming
Often unnecessary
Process unsettling for staff
Practical use of ZBB?
Normally use hybrid
E.g. every 5 years with incremental budgets within this period, significant changes in areas
What is Kaizen costing?
Based on continual improvements in cost performance
Small, incremental changes
Continual production of same product becomes cheaper as time passes
Goal to ensure this year cost less than last year
Target reduction rate established
Features of Kaizen costing?
Cost reduction system concept Assumes continuous improvement Goal to achieve cost reduction standards Targets set and applied monthly Cost variance analysis Investigations when target not attained
Features of conventional budgeting?
Cost control system concept Assumes stability Goal to meet standards Set annually or 6m Compare actual and budget costs Investigations when standards not met
What are rolling budgets?
Continuously updated at end of each control period C
Commonly monthly or quarterly
Advantages of rolling budgets?
More realistic and achievable as continuously planned
May reduce padding as managers realise they can continuously update performance benchmarks
Disadvantages of rolling budgets?
May encourage slack to give the impression of continual improvements
What it total life cycle budgeting?
Provides managers with info to understand and manage costs across all activities
Clarifies implications of decisions on rest of org
Renewed importance of R and D/design
What is top down budgeting?
Top level management agree to take on a project and decide on budget
Then divided between dept. and again between areas etc.
Good understanding of costs and consider all factors e.g. delays, overtime, wastage
Lower level can challenge but need evidence to support
What is bottom up budgeting?
Starts by estimating costs of each individual task then add together Avoid problem of inadequate budget Employee discussion Potential for budgetary slack Task may be missed out
Major criticism of budgeting?
Mismatch between length of time and action cycle
Length of budget cycle period
Important decision as incorrect can limit effectiveness of budgetary system
What are the factors each organisation should take into account when evaluating existing budget system?
What planning horizon How frequent report Human factors Budgeting techniques Strategies?
