Module 9 - Budgeting Techniques Flashcards
uses of budgets
- planning
- communicating
- coordinating
- controlling
- motivating
- evaluating
Sequence of budget creation
sales, production, overheads, r&d, admin, master
Budget padding
deliberate underestimate of future sales performance and/or overestimate of future costs to create good appraisal of a manager
Budgetary slack
additional amount added onto the expected costs/ revenue
Effective budgeting:
- linking budget explicitly to strategy
- demonstrating top management support for the budget
- participative budgeting
- using budget as a control tool
- balancing financial and non-financial aspects
Incremental budgeting
Taking historic budgeted figures and updating by an incremental amount each period
Adv Incremental budgeting
- simple
- easy to apply
- non-threatening
Disadv incremental budgeting
- perpetuates past inefficiencies
ZBB
- every budget centre starts with zero-budget allocation
- budget centre builds up budget proposals at difference levels of service and activity
- more money required more information needed
- each service level proposal is reviewed
- select and approve level of spending
Advantages of ZBB
- resources allocated on need
- increased participation of employees
- focus of VFM
disadvantages of ZBB
- time consuming
- often unnecessary
- unsettling for staff
Kaizen costing
- Method of budgeting based on continual improvement in cost performance through small, incremental changes.
- goal to ensure this year’s production cost is less than last year
Rolling budgets
A budget which is continuously updated at the end of each control period
Advantages of rolling budgets
Budgets are more realistic and achievable as they are continuously planned
May reduce budget padding as managers can continuously update performance benchmarks
Disadvantages of rolling budgets
Rolling budgets may encourage slack to give the impression of continual improvement
Top down budgetting
Begins the process with top level management agreeing to take on a project and deciding on the budget which is then divided amongst various departments
Bottom up budgeting
Starts by estimating the costs of each of the individual tasks involved in a project and adding them together
Responsibility based budgeting
A budget based on the profit centre of a manager - set by senior management with manager input
Activity based budgeting
Budget created based on the major activities within the business with each activity driving the budget assigned to it
Advantages of ABB
- ability to set more realistic budgets
- better identification of resource needs
- linking costs to outputs
- clearer linking of costs with staff responsibilities
- identification of slack
