Improving the budgeting process

Question 1

What influences an organisation’s approach to budget preparation?

Answer 1

Its operations

For example, a healthcare provider may use an incremental approach, while a software developer may not.

Question 2

What is incremental budgeting?

Answer 2

Using a previous period’s budget or actual results with an incremental adjustment

It is suited to organisations in markets with little competition.

Question 3

List the advantages of incremental budgeting.

Answer 3

• Simple to implement
• Less time-consuming

These benefits make it appealing for smaller organisations.

Question 4

List the disadvantages of incremental budgeting.

Answer 4

• Fosters overspending
• Incorporates budgetary slack
• Restricts growth opportunities
• Promotes maintenance of the status quo

These issues can lead to inefficiencies and missed opportunities.

Question 5

True or false: Incremental budgeting encourages a ‘use it or lose it’ mentality.

Answer 5

TRUE

This can lead to overspending and inefficiencies.

Question 6

What is the principle of zero-based budgeting (ZBB)?

Answer 6

Creating the budget from a zero base each year

Each department must justify its resource needs.

Question 7

List the considerations when preparing a decision package in ZBB.

Answer 7

• Core objective of the department
• Alternative methods of achieving the objective
• Expected costs and benefits
• Consequences of not performing the activity
• Measures of performance

These help in comparing and ranking departments.

Question 8

List the advantages of zero-based budgeting.

Answer 8

• Identifies and eliminates redundant activities
• Improves communication and coordination
• Reduces inefficiencies
• Questions the status quo

ZBB addresses many disadvantages of incremental budgeting.

Question 9

What are the disadvantages of zero-based budgeting?

Answer 9

• Complexity and time-consuming preparation
• Potential for demotivation of department heads
• High resource investment required

These factors can make ZBB unsuitable for small organisations.

Question 10

What is activity-based budgeting (ABB)?

Answer 10

An approach that identifies cost drivers to determine expected costs

It is useful for new organisations with little historic information.

Question 11

List the advantages of activity-based budgeting.

Answer 11

• Easier for managers to think operationally
• Identifies and eliminates non-value-adding activities
• More control over the budgeting process

ABB focuses on activities before considering costs.

Question 12

What is a rolling budget?

Answer 12

A budget that is continuously updated by adding a new period and dropping the expired one

This allows for regular reassessment and forecasting.

Question 13

List the advantages of rolling budgets.

Answer 13

• Anticipates potential problems
• Keeps the budget relevant and up to date

Regular updates help in proactive management.

Question 14

List the disadvantages of rolling budgets.

Answer 14

• Time-consuming preparation
• Can demotivate employees
• May create confusion about budget figures

Frequent updates can distract from actual performance.

Question 15

What are the limitations of traditional budgeting approaches?

Answer 15

• Focus on cost reduction
• Financially focused evaluation
• Longer budgeting cycles create bottlenecks
• Lack of flexibility and precision

These limitations can hinder long-term organisational success.

Question 16

What does the beyond budgeting concept propose?

Answer 16

A more flexible approach to budgeting that eliminates flaws in traditional processes

It includes rolling budgets and focuses on customer satisfaction and innovation.

Question 17

List characteristics of the beyond budgeting approach.

Answer 17

• Customer focus
• Decentralisation
• Use of nonfinancial performance indicators
• Empowerment of front-line staff

These characteristics aim for long-term organisational success.

Question 18

What is the focus of transparent and open information systems in an organization?

Answer 18

Creating a dynamic environment for long-term success

Emphasizes the importance of reliable and accessible information for decision-making.

Question 19

What does decentralisation in an organization allow?

Answer 19

Preparation of local budgets by managers with local knowledge

This contrasts with centralized budgets imposed by senior management.

Question 20

What type of performance indicators does beyond budgeting emphasize?

Answer 20

• Nonfinancial performance indicators
• Customer satisfaction
• Employee satisfaction
• Innovation in product development

Focuses on value creation rather than solely on financial performance.

Question 21

What is one key principle of beyond budgeting regarding frontline staff?

Answer 21

Empowerment to make decisions and react to changes

This creates a more motivated and innovative workforce.

Question 22

What is the goal of using external benchmarks in beyond budgeting?

Answer 22

Continuous improvement with competitors

Aims to enhance performance beyond just internal targets.

Question 23

Name the six principles for successful implementation of beyond budgeting.

Answer 23

• Develop a governance framework
• Focus on a high-performance environment
• Allow frontline teams freedom to make decisions
• Responsibility for value creation
• Incorporate customer outcomes into performance measures
• Require open and ethical information systems

These principles support a customer-driven approach.

Question 24

What is an advantage of beyond budgeting related to decision-making?

Answer 24

Quicker decision making by empowered local managers

This leads to improved responsiveness in a dynamic environment.

Question 25

What is a potential **disadvantage** of implementing beyond budgeting?

Answer 25

Difficulty coordinating the organization as a whole ## Footnote Each department preparing its own budgets may lead to a lack of goal congruence.

Question 26

What is a challenge related to using **external benchmarks**?

Answer 26

May be unrealistic and demotivating to the workforce ## Footnote This can impact employee morale and performance.

Question 27

What is the primary product of **Arlo Sports**?

Answer 27

Replica sports shirts and jerseys ## Footnote Manufactured in the United States and distributed internationally.

Question 28

What delivery promise does **Arlo Sports** offer?

Answer 28

48-hour delivery promise on all orders ## Footnote However, there have been instances of delays, particularly in Asia and Europe.

Question 29

What budgeting approach has **Arlo Sports** used since its inception?

Answer 29

Incremental budgeting approach ## Footnote Budgets are based on the previous year's budget with a 2.5% increment.

Question 30

What is one advantage of **Zero-Based Budgeting (ZBB)**?

Answer 30

Reduces redundant activities ## Footnote Establishes basic needs of each department to eliminate non-value-adding activities.

Question 31

How does ZBB improve **communication channels**?

Answer 31

Involves all departmental managers in the budget-setting process ## Footnote Enhances vertical and horizontal communication within the organization.

Question 32

What does ZBB avoid by ignoring previous budgets?

Answer 32

Inefficiencies from prior budget periods ## Footnote This helps in identifying further opportunities for efficiency.

Question 33

What does ZBB encourage regarding the **status quo**?

Answer 33

Questions the status quo ## Footnote Helps identify opportunities for improvement in production processes.

Question 34

What factors should an organization consider when deciding on a **budgeting approach**?

Answer 34

* Nature of the market * Resources available * Volume of data captured * Limitations of traditional budgeting techniques ## Footnote No single approach suits every organization; relevance to operations is key.