# Briefly explain the meaning of each of the following approaches to budgeting and give two advantages of each approach.

[Dec2007] 1. Rolling budgeting 2. Flexible budgeting 3. Zero-based budgeting Ans. Rolling budgeting: A rolling (or continuous) budget is one which is continually updated by adding a further accounting period (a month or a quarter) when the earlier accounting period has expired. Existing budgets may also be revised at the same time to reflect new circumstances. Advantages are as follows: They reduce the element of uncertainty in budgeting. Budgets prepared on a rolling basis are likely to predict inflation rates more accurately. Planning and control will be based on a recent plan instead of a fixed annual budget. Flexible budgeting: A flexible budget is a budget, which, by recognizing different cost behaviour patterns, is designed to change as volumes of output change. Its advantages are: It recognises different costs behave in different ways with respect to volume. It improves the quality of control information as it facilitates a comparison of like with like. Variances calculated against a flexed budget will give more meaningful control information than those against a fixed budget. It allows managers to forecast revenues, costs and profits at different activity levels and forces them to think about cost behaviour. # Explain how zero-based budgeting could be used to set budgets. Give two advantages of using zerobased budgeting.[Dec2006] Zero-based budgeting: The principal behind zero based budgeting is that the budget for each cost centre should be made form scratch or zero. Every item of expenditure must be justified in its entirely in order to be included in the next years budget. Zero-based budgeting used to set budgets involves three steps: 1. Management prepare decision packages for the tasks performed by their departments. 2. Junior and senior managers are then asked to rank decision packages against each other. 3. Resources are then allocated to the selected decision packages. Advantages are: o It is possible to identify and remove inefficient operations.

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It forces employees to avoid wasteful expenditure. It can increase motivation. It provides depth appraisal of organisations operations.

# Explain the following approaches to budget setting and give two advantages of each approach.[Dec2004] 1. A top down (or imposed) approach 2. A bottom up (or participative) approach. Ans. Top down approach: A top down approach to budgeting involves preparation of budgets by senior managers without giving the ultimate budget holder an opportunity to participate in the budgeting process. These budgets are then passed down to (imposed upon) budget holders. This approach has the following advantages: It gives senior management better control of the business. It should lead to tactical decisions that are in line with the overall strategic plan (goal congruence). It reduces the opportunity for junior managers to build slack (padding) into budgets. Depending upon the abilities and experience of senior and junior managers it could be argued to produce better quality decisions. Budgets should be prepared more quickly than under other approaches. Bottom up approach: A bottom up approach to budgeting is an approach which gives all budget holders an opportunity to participate in the setting of their own budgets. This approach has the following advantages: Budgets are based upon information from employees most familiar with the department and therefore should be more accurate. Budget holders are likely to have more commitment to budgets they have been involved in designing. Because of the above motivation and morale should improve. Because of the above less budget padding should occur. # Explain four benefits which would results from the introduction of a budgeting system by a company.[Dec2004] Ans. Budgeting systems are useful in the planning and control of a business. In planning they help to

 Coordinate the activities of various functional areas, for example by ensuring that the production department is making the products that the sales department are trying to sell. Ensure the best uses of scarce resources. Communicate the organisations plan to managers and employees. Force managers to plan for the coming period. In the control area they Allocate responsibility for various aspects of the business to budget holders. Authorise expenditure by managers. Provide targets that can help in the motivation of managers and staff. Allow the evaluation of managerial performance by comparing actual performance against budget. Provide useful control information, in the form of variances, calculated by comparing actual performance with budget. Prompt corrective action when actual results deviate from budgeted results. # Explain why budget variances should be calculated using flexed budget figures.[Dec2004] Ans. See flexible budget. Modify it. # Define the following terms and explain their importance to budgetary planning or control.[Dec2008] 1. Long-term (or strategic) planning 2. Principal budget factor[Dec2005] 3. Responsibility accounting. Ans. Read Dec 2008 # Define the terms cost centre, profit centre and investment centre. Describe one appropriate performance measure for each and state one difficulty of each of your suggested measures.[June2007] Ans. Read june2007