S2 - budgeting process

Question 1

what is strategic planning process

Answer 1

top management should normally have a vision of where the organisation is going in the next 5-10 years
Realise the vision: make plans and use plans to stay on track
Should consider longer term objectives and policies to achieve goals
Annual budget created in this context

Question 2

what is a budget

Answer 2

implementation of the long term plan for the year ahead
Shorter planning horizon so more precise and detailed
Clear indication of what is expected to be achieved during the budget period
Quantitative statement plans revenues, expenses, assets, liabilities and cash flows
Provides a focus and aids coordination of activities
Plan, control, performance evaluation, coordinate, motivate, communication

Question 3

what is a budget committee

Answer 3

composition - high level executive who represents the major segments of the business
Major task - ensure budgets are realistically establishes
Budget officer - coordinate individual budgets into a whole budget

Question 4

what is the budget process

Answer 4

identify budgeting period
May be continuous
Communicate expectations to managers
Determine limiting factor for organisation
Sales budget depends on sales forecast
Initial preparation of various functional budgets
Negotiation
Coordination for master budget and review
Final acceptance from budget committee
Budget review

Question 5

what are limiting factors

Answer 5

any factor which restricts demand, production or another resource
Limits activity
Determine starting point for budget
Principal budget factor = factor that cannot be overcome
Consider if it can be overcome or has to be accepted

Question 6

what are the types of budgeting

Answer 6

Incremental
Zero based
Planned programme
Rolling
Activity based

Question 7

what are benefits of budgeting

Answer 7

vehicle for communication of plans
Forces managers to think ahead
Process acts as a means of allocating organisational resources
Highlights potential problem areas
Coordinates and integrates activities of whole organisation
Serves as a benchmark for evaluation performance

Question 8

what are limitations of budgeting

Answer 8

changes not updated quickly enough
Encourages rigid planning and incremental thinking
Time consuming
Inadequate variance reports
Focuses too much on short term and ignored shareholder value drivers
Meets lower targets and doesn’t try to improve them
Behavioural implications - spend up to budget level