Wk 8 Budgets

Question 1

Define a budget

Answer 1

a formalised financial plan for the operations of an entity for a specified future period.

Is core of mcs
Manages resources & creates value
short term

Question 2

Describe the goals of budgeting

Answer 2

Planning
comms & coordingation
allocate resource
eval performance
control profit operations
Assigns responsibility and decision making authority to individual managers.
Monitors forecast operations against actual results (variance)

Tactical decisions are short term.
Strategic decisions long term.

Question 3

Budget is develop top down when senior management design strategies and communicate them down. Bottom up when department heads send forecasts up for approval. Describe the budget cycle

Answer 3

• Vision and core comps
• Long term strategies
• Develop operating plans
• Master budget
• Monitor and compare
• Investigate variance
• Evaluate and reward

Question 4

a Master budget extends from strategy Define & draw

Answer 4

master budget a comprehensive plan for an upcoming financial period, usually a year.

operating budget-management’s plan for
(left side strategy, right side assumptions)
Revenues
Costs

financial budgets-management’s
Capital exp
Balance sheet,
Income statement, 
Cashflow & financing

Question 5

Define participative budgeting, list pros & cons

Answer 5

Managers who are responsible for meeting budgets also prepare the initial budget forecasts (bottom up),

•	Pros – 
coordination 
understanding
accuracy
identify w/targets
less gamesmanship

• Cons –
exp and time consuming,
aggravates disagreements
allows padding

Question 6

List best practices in budgeting.

Answer 6

inclusive targets
achievable targets,
 match targets w rewards 
frequent feedback, 
only responsible for activities in control,

Question 7

Stewart & Fauerbach 1990 present the argument against budgets and suggests costs / income need to be viewed with other measures. List.

QSPT

Answer 7

Budgets ignore:
quality
satisfaction,
positive behaviour (tries to control negative behaviour)
targets become everything (stupid things done to make budget)

Suggests review costs and income in conjunction with other measures. Eg
return on capital
quality
customer satisfaction

Question 8

List contemporary approahces to budgeting

LPPZORK

Answer 8

• Line-item budgeting - 1 year, budget inputs
• Performance budgeting - resource use, monitors cost per unit.
• planning programme budgeting - budget by programme / outcomes
• zero base – justify each activity every time. Reduced waste, Ignores history, time consuming
• output budgeting - budget by programme / outputs
• rolling budgets - iterative budgets
• kaizan - targeted cost reductions across time

Question 9

List problems assocated with useing budgets

GABOP

Answer 9

Gamesmanship, 
achievable, 
buy in?
overreliance
Performance system challenges

Question 10

Define padding and slack - why do they occur?

Answer 10

Padding – interntionally underestimating revenue or costs

Slack – difference between padded estmate & a realistic one

• Reasons – looks better, cope w/uncertainty, exercise control

Question 11

List constraining factors against budget manipulation.

Answer 11

comparisons using historical records or external forecasts
rigid targets,
direct demand by managers
Bonuses paid on budget variance
Use a Flexible budget where fixed & var costs are seperated to more accurately reflect operations.

Question 12

What is strategic budgeting?

Answer 12

the process of considering alternative courses of action on profit, assets and cash flow management.