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Operational Case Study > P1 - Budgeting > Flashcards

P1 - Budgeting Flashcards

1
Q

What is a buget?

A

A financial and/or quantitative plan of what an organisation intends to achieve for the forthcoming period

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2
Q

What are the 5 main benefits of budgeting?

A
  1. Control
  2. Responsibility
  3. Integration (co-ordination)
  4. Motivation
  5. Evaluation
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3
Q

What are the 3 main ways of forecasting future figures?

A
  1. Simple average growth
  2. Estimates based on judgement
  3. Time series analysis
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4
Q

What is a time series forecast?

A

A set of data observed over a period of time that is used to forecast the future

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5
Q

What are the 4 elements of a time series forecast?

A
  1. Trend (underlying long term movement in historic data)
  2. Seasonal Variation (short term periodic fluctuations)
  3. Cyclic Variation
  4. Random Variations
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6
Q

When is it better to use the additive model of seasonal variations?

A

In simple modelling, when there is little underlying growth

TS = T + S

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7
Q

When is it better to use the mutiplicative model of seasonal variations?

A

In complex modelling, when there has been underlying growth or recession

TS = T x S

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8
Q

What does using linear regression give us?

A

The ‘line of best fit’ in our historic data

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9
Q

What does the correlation coefficient show?

A

The strength of the relationship between two variables (how close the line of best fit is to the real data)

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10
Q

What does the coefficient of determination show?

A

The proportion of the change in the dependent variable that is caused by the change in the independent variable

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11
Q

What is a data outlier?

A

Data that does not fit with the other results in the population

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12
Q

What are 4 possible internal sources of budget data?

A
  1. Accounting systems
  2. HR records
  3. Marketing department records
  4. Production department records
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13
Q

What are 4 possible external sources of budget data?

A
  1. Government stats
  2. Financial press
  3. Trade publications
  4. The internet and Big Data
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14
Q

What is Big Data?

A

It involves capturing and processing data on a vast scale and converting it into useful information

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15
Q

What are the 3 Vs of Big Data?

A
  1. Volume
  2. Velocity
  3. Variety
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16
Q

What is the aim of data analytics?

A

To obtain insights from big data, and to discover trends/relationships that can help to address business issues

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17
Q

What 4 impacts might big data have on budgeting?

A
  1. Make budgeting estimates more accurate by providing missing data or showing correlations
  2. Identifying revenue opportunities by improving customer offerings/targeting
  3. Building a better picture of competitions, which allows better forecasting of their own results
  4. Identifying ways of reducing costs through efficiencies and removing non-value adding activities
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18
Q

What are the 3 main issues with big data?

A
  1. Systems need to be sophisticated to deal with the speed, volume and variety of data
  2. Fourth V - veracity (is it reliable?)
  3. Knowing what is actually useful is complex and time consuming
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19
Q

What is the principle budget factor?

A

The factor which limits what an organisation can achieve

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20
Q

Why is it critical that companies monitor their cash balances?

A

A lack of cash is the most common cause of business failure

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21
Q

What is a cash budget?

A

A detailed budget of estimated cash inflows and outflows, incorporating both revenue and capital items

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22
Q

What 4 things might a business do if they identify a potential cash shortage?

A
  1. Organise an overdraft
  2. Offer early payment discounts
  3. Delay payables
  4. Raise other finance
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23
Q

What is incremental budgeting?

A

Where the budget for the next period is calculated by taking the current period and adding on an amount to account for anticipated inflation and growth

24
Q

What are the 3 main advantages of incremental budgeting?

A
  1. Stable, change is gradual
  2. Simple to operate and easy to understand
  3. Easy co-ordination
25
Q

What are the 3 main disadvantages of incremental budgeting?

A
  1. Assumes ways of working continue
  2. Budget assumptions and activities may be out of date
  3. Budgetary slack will never be reviewed
26
Q

What is a rolling budget?

A

Budgets prepared every few months that cover the next 12 month period and are extended by another budget period each time

27
Q

What are the 3 main advantages of rolling budgeting?

A
  1. Limit uncertainty as they are updated frequently
  2. Forced to regularly reassess assumptions
  3. Planning and control decisions based on recently prepared plans
28
Q

What are the 2 main disadvantages of rolling budgeting?

A
  1. Greater time and expense

2. Benefits may be limited, especially if assumptions don’t change

29
Q

What is zero based budgeting?

A

A budget that starts at nil every period and requires managers to justify every item of expenditure even if it has been accepted previously

30
Q

What are the 3 steps of zero based budgeting?

A
  1. Establish a decision package for every item
  2. Review and rank all the packages on their benefits
  3. Allocate resources in order of importance until they are used up
31
Q

What are the 3 main advantages of zero based budgeting?

A
  1. Efficient allocation of resources
  2. Increases staff motivation
  3. Identifies and eliminates waste
32
Q

What are the 3 main disadvantages of zero based budgeting?

A
  1. Time consuming and difficult to establish decision packages
  2. Threatens R&D departments, favours production
  3. Difficult to administer and communicate because more managers are involved in the process
33
Q

What is activity based budgeting?

A

A method of budgeting based on activity framework and utilising cost driver data in the budget setting and variance feedback process - actually identifying what drives the cost

34
Q

What are the 2 main advantages of activity based budgeting?

A
  1. Focuses on the true drivers behind costs

2. Enables more efficient improvement programmes

35
Q

What are the 2 main disadvantages of activity based budgeting?

A
  1. Time consuming and resource intensive

2. Concept is not readily understood

36
Q

What are 3 main issues faced by multinational companies in budgeting?

A
  1. Targets set in home country currency may fluctuate when converted to another currency
  2. Local regulation and political restrictions affect choices when budgeting
  3. Different customers in different markets requiring additional local costs for adaptation
37
Q

What is feedback control?

A

Actual results are compared to budgets/forecasts and relevant action is taken - backward looking, re-active process

38
Q

What do you do with positive or negative feedback?

A
  • Revise future targets

- Correct substandard performance

39
Q

What is feed-forward control?

A

Forecasting the differences between forecast and planned/budgeted outcomes, and the implementation of action, before the event, to avoid such differences - pro-active process

40
Q

What are the 3 main things that make up effective budgetary control?

A
  1. Targets are achievable but stretching
  2. Clearly define responsibilities
  3. Effective feedback control - action taken promptly
41
Q

What is a fixed budget?

A

A budget set prior to the control period and not subsequently changed, used as a benchmark in performance evaluation

42
Q

What is flexible budget?

A

Flexing variable costs to actual activity levels achieved whilst keeping

43
Q

What is what-if analysis? (sensitivity analysis)

A

Changing variables within analysis to see what impact it has on the results, testing how sensitive the assumptions are

44
Q

What are the 2 main factors of budgeting that will affect motivation?

A
  1. Achievability (Challenging but achievable)

2. Participation

45
Q

What are the 3 main benefits of top down budgeting?

A
  1. Consideration on corporate strategy
  2. More time efficient, fewer people involved
  3. Co-ordination of plans and objectives
46
Q

What are the 3 main disadvantages of top down budgeting?

A
  1. Lack of local knowledge
  2. Staff not committed
  3. More senior management time needed
47
Q

What are the 3 main benefits of participative budgeting?

A
  1. More informed and realistic budgets
  2. Commitment to achieving budgets
  3. Encourages communication between departments
48
Q

What are the 3 main disadvantages of participative budgeting?

A
  1. Fits local objectives rather than corporate ones
  2. Budgetary slack can be built in
  3. More time required overall
49
Q

What are 3 dysfunctional behaviours that may be seen to reduce variances in traditional budgeting systems?

A
  1. Large quantities to gain price favourability, leading to high inventories
  2. Low quality materials used to reduce wastage
  3. Work rushed to achieve labour efficiency
50
Q

What are the 3 main ethical issues arising from behaviours in bottom up budgeting?

A
  1. Budgetary slack
  2. Unrealistic budgets to make holders look good
  3. Focusing on the short term and causing long term problems
51
Q

What are the 3 main ethical issues arising from behaviours in top down budgeting?

A
  1. Excessive pressure from above to meet targets
  2. Demotivating budget-holders
  3. Passing responsibility to budget holders of costs they do not control
52
Q

What are the 2 issues with standards that arise in the rapidly changing modern environment?

A
  1. Standards are ignored so control benefits are lost

2. Actual operations are modified to fit the standard rather than develop further

53
Q

What are the 3 main criticisms of traditional budgeting?

A
  1. Time consuming and expensive but with low benefit
  2. Protect rather than reduce costs
  3. Fail to focus on shareholder value, just internal targets and costs
54
Q

What is beyond budgeting?

A

The attitude that rolling forecasts, market targets and regular reviews are better than traditional budgets, with more focus on future development

55
Q

What are the 3 main benefits of beyond budgeting?

A
  1. Faster response time - more flexible and proactive
  2. Performance targets are based on competitive success
  3. Greater motivation due to decentralisation of responsibilities
56
Q

What are the 3 main disadvantages of beyond budgeting?

A
  1. More complex planning and co-ordination
  2. Difficulties in evaluation and reward determination
  3. Focus on external focus resulting in a lack of internal goals

Operational Case Study (10 decks)

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