What is budget?

9 important questions on What is budget?

Disadvantages of line item budgets?

  • Inflexible in responding to unanticipated needs
  • Little incentive for cost savings

What is budget lapsing?

Budget lapsing is the requirement that funds allocated for a paritcular year cannot be carried over to the following year. So the manager will spend everything he didn't spend at the end of the year, because he cannot save it for the next year. 

What are the advantages of budget lapsing?

  • tighter control than budgets that do not lapse
  • prevents risk averse managers from accumulating funds
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What are the disadvantages of budget lapsing?

Encourages wasteful spending near end of fiscal year.

What are static budgets?

A static budget doesn't vary with volume. Managers is responsible for volume changes. Profit center.

What are flexible budgets?

Flexible budgets -> adjustment for volume changes (do vary with volume changes) Manager is not held responsible for volume changes a cost center.

What is incremental budgeting?

The budget is based on the current year's core budget and they made some changes in it = budget next year.

review focuses on incremental chages and may ignore inefficiencies in core budget.

What is zero based budgeting (ZBB)?

You start from scratch. You begin from the beginning again. But it is way to costly and difficult.

What is the advantage of zero based budgeting?

  • It motivates managers to eliminate inefficient expenses.
  • Useful when firm is changing strategic direction or when uncertainty is high.

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