Budgets and budgetting
7 important questions on Budgets and budgetting
What are the three planning cycles?
- long range: setting a vision, a mission, and objectives & how we achieve the objective, i.e., stratgies
Capital budgeting (programming
- middle range: resource allocation
Operational budgeting
- annual: preparation of a short term financial plan =budget
What are the purposes of budgeting?
- promotes forward thinking
- controls cash flow and identifies financial needs
2) communication & coordination
- knowledge transfer: vertical and horizontal
- ensure that expectations and assumptions are consistent
3) motivation
- can act as targets and are linked to performance evaluation and reward systems. Goal theory
4) contracting
- often budgets are negotiated. Problems arise, are investigates, strategies adjusted. Etc.
Why is budgeting criticized?
- sticky (incremental thinking, minor changes 2 last budget)
- assumptions needed
- lack of flexibility and agility
- encouraging short termism (current year / quarter focus)
- encourage gaming, dishonesty and politicking
- Higher grades + faster learning
- Never study anything twice
- 100% sure, 100% understanding
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What is Jensen's compensation system?
Jensen suggests taking out any kinks to remove gaming but
- dishonest managers lie about performance
- often weaker incentives
- non monetary tewards also have to be independent of budget targets
Who should set the target?
Top-down budgeting. Begin with aggregated for the firm and disaggregate down. Providing more control but being less informative for decision making.
Bottom up. Lower level have more knowledge. Managers are held responsible for meeting target they propose. And thus more commited.
What are flexible, static targets and budgets?
Fixed: hit target and lose motivation. Move sales to periods.
Static budget: do not vary with sales volume. Preps for one level activity.
Flexible budget are a function of some volume measure
What is target ratcheting?
Remove by:
- eliminating targets
- zero based budgetting
- job rotation
- relative targets
The question on the page originate from the summary of the following study material:
- A unique study and practice tool
- Never study anything twice again
- Get the grades you hope for
- 100% sure, 100% understanding
