Module 16: Budgeting Techniques

Question 1

What are the 6 key areas that the use of a budget helps in the business?

Answer 1

Planning
Communicating
Co-ordinating
Controlling
Motivating
Evaluating

Question 2

Criticisms of Traditional Budgets?

Answer 2

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

Question 3

Proposals for improving the effectiveness of budgeting?

Answer 3

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

Question 4

Human aspects of budgeting?

Answer 4

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

Question 5

What is budget padding?

Answer 5

Deliberate underestimate of future sales performance

And/or overestimate of future costs to create good appraisal

Question 6

What is budgetary slack?

Answer 6

Amount added onto expected costs/revenue

Question 7

What are possible effects of budget padding?

Answer 7

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

Question 8

Difficulty in setting budget?

Answer 8

Behavioural impact- too difficult will give up, too easy might not try best

Question 9

What is incremental budgeting?

Answer 9

Taking historic budgeted or actual figures and updating by an incremental amount each period

Question 10

Advantages of incremental budgeting?

Answer 10

Simple, easy to apply
Non-threatening
All figures known, start wit prior year position
Discussions focus on marginal changes

Question 11

Disadvantages of incremental budgeting?

Answer 11

Perpetuates past inefficiencies e.g. budgetary slack

‘Business as usual approach’

Question 12

What is Zero Based Budgeting?

Answer 12

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

Question 13

Advantages of ZBB?

Answer 13

Resources allocated on need
Increased participation of employees in process
Focus on value for money

Question 14

Disadvantages of ZBB?

Answer 14

Time consuming
Often unnecessary
Process unsettling for staff

Question 15

Practical use of ZBB?

Answer 15

Normally use hybrid

E.g. every 5 years with incremental budgets within this period, significant changes in areas

Question 16

What is Kaizen costing?

Answer 16

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

Question 17

Features of Kaizen costing?

Answer 17

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

Question 18

Features of conventional budgeting?

Answer 18

Cost control system concept
Assumes stability 
Goal to meet standards
Set annually or 6m
Compare actual and budget costs
Investigations when standards not met

Question 19

What are rolling budgets?

Answer 19

Continuously updated at end of each control period C

Commonly monthly or quarterly

Question 20

Advantages of rolling budgets?

Answer 20

More realistic and achievable as continuously planned

May reduce padding as managers realise they can continuously update performance benchmarks

Question 21

Disadvantages of rolling budgets?

Answer 21

May encourage slack to give the impression of continual improvements

Question 22

What it total life cycle budgeting?

Answer 22

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

Question 23

What is top down budgeting?

Answer 23

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

Question 24

What is bottom up budgeting?

Answer 24

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

Question 25

Major criticism of budgeting?

Answer 25

Mismatch between length of time and action cycle

Question 26

Length of budget cycle period

Answer 26

Important decision as incorrect can limit effectiveness of budgetary system

Question 27

What are the factors each organisation should take into account when evaluating existing budget system?

Answer 27

What planning horizon
How frequent report
Human factors
Budgeting techniques
Strategies?