W10 - Budgeting

Question 1

Functions of Budgeting
4

Answer 1

Planning annual operations
Coordinating activities firmwide
Motivating managers
Evaluating performance

Question 2

3 Main budget approaches

Answer 2

Incremental:
Existing operations taken as starting point

Zero-based:
Projected expenditure starts from ‘base zero’ rather than last year’s budget, forcing managers to justify all expenditure

Rolling:
Budget kept continually up-to-date by adding another accounting
period (e.g., month or quarter) when the earliest accounting period
has expired.

Question 3

Incremental Budgeting
Pros and Cons

Answer 3

Pros:
- Quickest and easiest method
- Suitable if company is stable

Cons:
- Builds in previous problems and inefficiencies
- Incentives to overspend

Question 4

Zero-based budgeting

Answer 4

Pros:
- Value for money
- Efficient resource allocation

Cons:
- Long & complex
- Short termism

Question 5

Rolling budgeting
Pros & Cons

Answer 5

Pros:
- Dynamic
- More up to date

Cons:
- Long and costly
- Demotivation risk

Question 6

Top-down budgeting
Pros & Cons

Answer 6

Pros:
- Ensures consistncy with strategic plans
- Decreases input from inexperienced managers
- Budget produced quicker

Cons:
- Potential for unachievable budgets
- Low acceptance of the budget by those actually applying it e.g. managers
- Loss of training and progression opportunities for staff

Works in:
Small businesses (where senior managers are well informed)
Where lower managers lack budgeting skills

Question 7

Scenarios when Bottom-up budgeting is well-suited

Answer 7

Pros:
- Based on info from those who may be better informed
- Knowledge from all operational levels pooled together
- Specific resource requirements included, maybe more in-depth
- Increased commitment to budget

Cons:
- Takes longer
- Budget slack (padding) may be introduced to give managers more leeway
- Requires managers to be skilled in budget setting

Works in:
Well established companies

When managers have strong budgeting skills

When different units act autonomously

Question 8

Problems with budgets

Answer 8

• Lack of coordination between budget setters and those implementing them
• Build slack into budget
• May just try to achieve target rather than exceed it
• Managers often spend whole budget allowance even if unnecessary
• Managers may be held responsible for factors outside of their control