Rationale For Budgets Flashcards
What is the purpose of preparing a budget?
- Planning - forces management to look ahead
- Responsibility - clarifies what the budget holder can control and who is accountable for achieving the target.
- Integration and co-ordination- between departments/divisions.
- Motivate employees to improve their performance - interest and commitment of employees can be retained if there is a system that lets them know how well or badly they are performing.
- Evaluation and control - compare actual performance to budget targets.
What is incremental budgeting?
Where budget is based on current year’s budget plus an extra amount for estimated growth or inflation.
What are the advantages of Incremental budgeting?
- Simple and cheap
- Relatively quick to administrate
What are the 5 Limitations of Incremental Budgeting?
- Does not identify inefficient operations.
- Budgetary slack.
- Not suitable for changing environments.
- Encourages management to spend budget so budget will not be cut next year.
- Doesn’t produce challenging performance targets or improving business.
What is the definition of ZBB?
Requires each cost element to be specifically justified as though they were being undertaken for the first time.
What is the 3 step approach to ZBB?
- Define decision packages- mutually(alternative methods)and Incremental(aspect of activity in levels).
- Evaluate and rank each activity.
- Allocate resources.
What are the 4 Advantages ZBB?
- Identify and remove inefficient or obsolete operations.
- Close examination of operations.
- More efficient allocation of resources. Challenge status quo.
- Responds to changes in business environment.
What are the 5 disadvantages of ZZB?
- Short term benefits emphasized bur let no long term benefits.
- Impression that all decisions have to be made in budget.
- May call for management skills organization doesn’t have.
- Organization info systems may not provide accurate info
- Ranking process can be difficult.
What is the definition of a Rolling Budget?
Continously updated by adding a further accounting period when earliest accounting period has expired. Beneficial where future costs cannot be forecast.
What are the 5 Advantages of Rolling Budgets ?
- Uncertainty is reduced. Focus on planning.
- Managers have regularly to assess budget.
- Planning and control based on more recent plan.
- Budget continuous and extend a number of months ahead.
- Takes account of recent performance and market conditions.
What are the 3 Disadvantages of Rolling Budgets?
- Effort and expense to continuously update budget.
- Demotivate managers if they don’t see point of regular revision.
- Revised budget put pressure on accounting department.
What are 4 values of long-term planning and budgets?
- Without long-term objectives, managers do not know what they should be trying to achieve and so there are no criteria against which to assess possible courses of action.
- Without long-term planning, budgets may simply be based on sales forecast. Performance can therefore only be judged in terms of previous years’ results, no analysis of organisation’s potential having been carried out.
- Many business decisions need to be taken on a long-term basis such as whether to start a new product line.
- With long-term planning, limiting factors (other than sales) that might arise can possibly be anticipated, and avoided or overcome.
What are the 5 advantages of implementing a budget?
PRIME
P = Forces organisation to PLAN and set targets
R = Allocates Responsibility
I = Encourages coordination and integration between departments
M = Can motivate employees
E = Provides targets to EVALUATE performance
What are the 4 disadvantages of budgeting?
- Can result in fixation and loss of flexibility
- Takes management time and money to produce
- Can be demotivating if considered to hard (or easy)
- Variance reports and other evaluation outputs do not offer solutions
What is the definition of an Activity Bases Budget (ABB) ?
Uses the costs determined using activity based costing (ABC) as a basis for preparing budgets.
