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30 Cards in this Set
- Front
- Back
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Why are budgets a key component of an organisation's planning and control system?
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They provide a mechanism to translate goals into financial terms
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What are budgets specifically?
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Budgets are forecasts of future revenues and expenditures
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What does the popularity of budgeting indicate?
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It indicates that the percieved benefits are greater than its costs as 20% of managers' time is spent on budgeting
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What is budgeting for, in terms of planning?
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Budgeting generates and communicates information to improve co-ordination. It is the initial step to implement change in response to changes in the firm's environment or the change in consumer prefereces
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What are the control benefits of budgets?
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- It sets benchmarks
- Assigning responsibilities and scarce resources - Providing goals and motivate managers - Establishing performance measures for rewards |
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Why does budget information have to flow up AND down?
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- Bottom-up: top-level managers need information from bottom to make better decisions
- Top-down: lower-level managers need information from top to know targets and meet them |
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Why should budgets be tight but achieveable?
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- If goals are achieved to easily they provide little incentive for extra effort
- If they are unachievable they provide little motivation |
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What is a variance?
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The difference between a budgeted performance measure and an actual performance measure
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What budget type could be useful in a volatile market?
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A monthly rolling budget
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What effect could too much emphasis on the budget as a performance measure have?
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Managers with specialised knowledge will stop disclosing accurate forecasts and report figures that make the benchmakrs easier to achieve
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Where is the conflict between planning and control greatest?
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In marketing because sales will underforecast. Thus too little is produced and costs are incured due to suboptimal production schedules
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Whay does the CEO have immediate control over the budget?
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- It signals the importance of the budgeting process
- Resolving disagreement requires trade-offs and the CEO has an overall view of the firm and therefore is best able to make trade-off decisions |
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Why can a budgeting committee be useful?
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Because it usually consists of major functional excecutivesand therefore facilitates the exchange of specialised knowledge and the achievement of budget consensus
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What is the trade-off between bottom-up and top-down budgeting?
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- top-down provides better control
- bottom-up provides greater motivation by lower level becasue of participation in budgeting |
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What is another name for bottom-up budgeting?
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Participation budgeting
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What impact does the location of knowledge have on the budget?
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Depending on where the knowledge is located i.e. field or central management, the budget should be more bottom-up or top-down accordingly
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What are budget systems used for?
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They are an administrative device to resolve organisational problems such as help to link knowledge with the responsibilities to make planning decisions, distribute responsibilities etc
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What are long-term budgets a feature of?
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They are a feature of the organisation's strategic planning process
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What is strategic planning?
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It is the process whereby managers select the firm's overall objectives and the tactics to achieve these
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What is strategic planning primarily concerned with?
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How the organisation can add customer value and respond to competitors
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What are long-term budgets used for?
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Primarily used for planning eg. assest acquisitions etc
NOT performance measurement |
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What do long-term budgets force maangers to do?
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Think about strategy and communicate specialised knowledge of potential markets
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What uses, other than planning, do long-term budgets have?
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Because they are not used for performance measurement, they are used to reduce managers' focus on short term performance i.e. reduce incentive to cut expenditures to improve short term performace
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What does responsibility accounting indentify?
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Responsibility centres such as:
- cost centres - revenue centres - profit centres etc |
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What does responsibility accounting assume and how does it do so?
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it assumes costs are controllable. It traces costs to the activity that caused the cost so that a person or centre can be held responsible
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What is responsibility accounting aimed at?
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Aimed at tracing costs. Therefore the person made responsible may not be in control of the costs but has the best knowledge about them
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What is a biased budget?
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It is a budget with budgetary slack which means an underestimation of capabilities or revenues or an overestimation of costs and resources
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What are the reasons for biased budgets?
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- The more a budget is relied on the more incentive there is to make it slack
- Participation is an opportunity to introduce slack - Informational advantages of individuals - Uncertainty about available information |
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Why may biased budgets be useful?
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- Budgetary slack may serve as a buffer
- Helps to improve performance when budgets are significant - isolates risk averse subordinates from excessive risk - increases job-satisfaction |
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What is a challenge of responsibilty accounting?
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Cross-domain responsibility
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