Part 1: Budget

Question 1

Top-down budgeting?

AD and DIS?

Answer 1

Prepared Centrally by SENIOR MANAGEMENT, operational manager little participation

Ad:

• Consistent with the overall strategy
• Co-ordination and avoid inconsistencies between departments

Dis:
- Local managers not involve, so decrease motivation

Question 2

Bottom-up budgeting?

AD and DIS?

Answer 2

LOCAL MANAGER prepare their own budgets – or at least participate in the budget setting process

Ad:
- Local managers are motivated and they have more information about unit operation

Dis:

• Dysfunctional behavior
• Slack, set easy targets

Question 3

Incremental budgeting?

AD and DIS?

Answer 3

Basing on the current year’s results plus an extra amount (an ‘increment’) for estimated growth or inflation next year

Ad:

• Easy and quick
• Useful in a STABLE environment: historic figures can provide a reliable basis for projecting future figures

Dis:

• Don’t improve performance by taking alternative options: the inefficiencies will be perpetuated rather than challenged
• Encourage slack and wastage: spend the full amount of their current year’s budget in order to preserve the same level of the budget next year

Question 4

Zero-based budgeting?

AD and DIS?

Answer 4

Involves deconstructing the existing cost base and analyzing the fundamental elements that drive cost, before preparing the budget the ground up (ie from a ‘zero base’).

Ad:

• Responds to changes
• Closely to cost behavior patterns
• Identify inefficient or obsolete processes
• Eliminate unnecessary cost

Dis:

• Lots of time
• Training to use ZBB technique

Question 5

Rolling budgets?

AD and DIS?

Answer 5

• Is continuously updated by adding a further period (a month or quarter) when the earliest period has expired. The budget is then recalculated using the actual data from the most recent period as a basis.

Ad:

• Reduce uncertainty and suitable for the unstable environment
• Planning and control based on a recent plan which is more realistic
• Better basis for appraising performance

Dis:

• Time, effort and money
• Demotivated by regularly changes and may not see the value
• Not necessary in stable environment

Question 6

Fixed budgets?

Answer 6

Not adjusted to the actual volume of output or level of activity attained in a period

Question 7

A flexible budget?

AD and DIS?

Answer 7

Recognises the potential uncertainty in actual output levels

Ad:
- It is possible to find out well, so the output will fall, which situation has been prepared

Dis:
- Little benefits in a stable environment

Question 8

Activity-based budgeting?

AD and DIS?

Answer 8

Activity-based budgeting involves defining the activities that UNDERLIE the financial figures and using the level of activity to decide how much resource should be allocated and how well it is being MANAGED and to EXPLAIN variances from budget.

Ad:

• Focus on control, manage cost drivers and eliminate activities which are not value-adding
• Identify critical success factors
• ABB is useful as CRC is changing the nature of its operations

Dis:

• Time and effort to prepare
• Suitable for companies use ABC costing, ERPS
• Not suitable for companies with high fixed cost