A306 EXAM 3 - DEMERE UPDATED ACTUAL QUESTIONS
AND CORRECT ANSWERS
Question:
1. Budget
Answer:
detailed doc that translates the company's objectives into financial terms and identifies the resources and
expenditures that will be required over a specific planning horizon (typically a year)
benefits:
1. thinking ahead
- managers plan and set goals for future
- provides lead time to solve problems (ex: bottle necks)
2. Communication
- allows communication of expectations and priorities
- promotes coordination + cooperation with in a comp
3. Motivating
- sets goals for employees
- motivates employees to work toward the comp's objectives
- provides a benchmark for evaluating performance
Question:
2. Questions to ask when preparing each budget
Answer:
- What should the starting point be? What other inputs are needed?
- Is a beginning balance (or inventory) relevant?
For budgets that include inventory:
- When calculating quarterly values for beginning and ending inventory, you cannot sum the individual
monthly values - beginning inventory reflects the value at the beginning of the quarter and ending
inventory reflects the value at the end of the quarter
For budgets that focus on cash:
- Be careful to differentiate between cash sales/purchases (that occur immediately) and credit
sales/purchases (that occur later)
- Be careful to exclude non-cash items (e.g., depreciation)
Question:
3. Bugeting - Planning and Control cycle
,Answer:
Planning:
- The future-oriented stage of the planning and control cycle
- Setting goals (targets) for the future
- Developing budgets to operationalize goals, determine resource needs, and identify potential challenges
in advance
- Communicating operational needs and coordinating activities throughout the company
Control:
- The review stage of the planning and control cycle ’ end of period once plan is implemented and they
have been operating to know what results are
- Evaluating whether the goals and budgets set in the planning stage were met comparing actual results to
budgeted results (understanding variances) ’ evaluate how effectively we performed relative to goals and
budgeted
- Determining corrective actions to improve future results and updating future plans - starting the cycle
again
- comparing actual results to budgeted = variances
- this lets us see what we need to do differently to update plans for future
Behavioral Considerations
- ppl respond to budgets in different ways
- top down vs participative (bottom up)
NOTE: future oriented nature of budgeting process terms ’ budgeted, predicted, estimated, forecasted,
anticipated, expected & planned
Question:
4. How is the budget set and what is the starting point?
Answer:
Set: The budgeting process tends to be iterative ¤ Each step goes through multiple revisions ¤ The process
involves examining targets, challenging assumptions, and evaluating alternatives ¤ Various managers have
to determine resources needs, targets, and projected expenditures Starting point: Many companies use the
previous budget as a baseline ¤ Can lead to bloated budgets if targets and expenses are not re-evaluated
carefully
Some companies use a "zero base" ¤ Referred to as zero-based budgeting ¤ All targets and expenses are
reconsidered and must be justified from scratch start ’ from scratch. ensures everything in budget is
deemed necessary for upcoming period ¤ Can be very time-consuming ’ so only do occasionally not every
period
Question:
5. 2 main behavioral considerations with budgeting
, Answer:
Difficulty of targets
a. Performance goals (targets) that are too difficult to achieve can be demotivating ¢ Can also occur if
resources are not sufficient (budgeted costs are too low)
b. Performance goals (targets) that are too easy may reduce performance ¢ Employees may prefer easier
targets (budget slack), where they can under-promise, but over-deliver
c. Budgets should be challenging, but attainable ¢ Supports goal congruence and promotes employee
motivation
Use-it-or-lose-it
a. Some budgets include funds for specific expenditures or investments - if the funds are not used, then
they may not "roll forward" to the next period ¢ Creates an incentive to use the funds even if they may not
be necessary ¢ Leads to a goal congruence problem
Question:
6. Budgeting approaches
Answer:
Top-down: Advantages
- Time savings (less coordination)
- Incentives to be accurate (avoid slack)
Disadvantages
- Potential to overlook opportunities
- Information asymmetry
- Reduced employee morale
Participative (bottom-up): Advantages
- Team-based
- Greater employee commitment
- Greater motivation
- Better information
Disadvantages
- Incentives to create slack
Question:
7. Budget Horizons: Long-term VS Short-term VS Rolling
Answer:
Long-term: strategic
- less detailed
- focused on general approaches to achieving comp's strategies
- major capital investments and other actives necessary to peruse comp's strategy
Short-Term: operating
- more detailed
- enable mangers to understand what resources they will have available and what they need to do as they
work towards comp's objective
- 1 yr window, but usually broken into even smaller horizons (quarterly or monthly)
Rolling Budget:
- as one month is completed, another month is added
- with a 1 yr budget, as you get deeper into the year, we have fewer additional months of budget available
- ex: as march is completed, add on march of the next year to budget
AND CORRECT ANSWERS
Question:
1. Budget
Answer:
detailed doc that translates the company's objectives into financial terms and identifies the resources and
expenditures that will be required over a specific planning horizon (typically a year)
benefits:
1. thinking ahead
- managers plan and set goals for future
- provides lead time to solve problems (ex: bottle necks)
2. Communication
- allows communication of expectations and priorities
- promotes coordination + cooperation with in a comp
3. Motivating
- sets goals for employees
- motivates employees to work toward the comp's objectives
- provides a benchmark for evaluating performance
Question:
2. Questions to ask when preparing each budget
Answer:
- What should the starting point be? What other inputs are needed?
- Is a beginning balance (or inventory) relevant?
For budgets that include inventory:
- When calculating quarterly values for beginning and ending inventory, you cannot sum the individual
monthly values - beginning inventory reflects the value at the beginning of the quarter and ending
inventory reflects the value at the end of the quarter
For budgets that focus on cash:
- Be careful to differentiate between cash sales/purchases (that occur immediately) and credit
sales/purchases (that occur later)
- Be careful to exclude non-cash items (e.g., depreciation)
Question:
3. Bugeting - Planning and Control cycle
,Answer:
Planning:
- The future-oriented stage of the planning and control cycle
- Setting goals (targets) for the future
- Developing budgets to operationalize goals, determine resource needs, and identify potential challenges
in advance
- Communicating operational needs and coordinating activities throughout the company
Control:
- The review stage of the planning and control cycle ’ end of period once plan is implemented and they
have been operating to know what results are
- Evaluating whether the goals and budgets set in the planning stage were met comparing actual results to
budgeted results (understanding variances) ’ evaluate how effectively we performed relative to goals and
budgeted
- Determining corrective actions to improve future results and updating future plans - starting the cycle
again
- comparing actual results to budgeted = variances
- this lets us see what we need to do differently to update plans for future
Behavioral Considerations
- ppl respond to budgets in different ways
- top down vs participative (bottom up)
NOTE: future oriented nature of budgeting process terms ’ budgeted, predicted, estimated, forecasted,
anticipated, expected & planned
Question:
4. How is the budget set and what is the starting point?
Answer:
Set: The budgeting process tends to be iterative ¤ Each step goes through multiple revisions ¤ The process
involves examining targets, challenging assumptions, and evaluating alternatives ¤ Various managers have
to determine resources needs, targets, and projected expenditures Starting point: Many companies use the
previous budget as a baseline ¤ Can lead to bloated budgets if targets and expenses are not re-evaluated
carefully
Some companies use a "zero base" ¤ Referred to as zero-based budgeting ¤ All targets and expenses are
reconsidered and must be justified from scratch start ’ from scratch. ensures everything in budget is
deemed necessary for upcoming period ¤ Can be very time-consuming ’ so only do occasionally not every
period
Question:
5. 2 main behavioral considerations with budgeting
, Answer:
Difficulty of targets
a. Performance goals (targets) that are too difficult to achieve can be demotivating ¢ Can also occur if
resources are not sufficient (budgeted costs are too low)
b. Performance goals (targets) that are too easy may reduce performance ¢ Employees may prefer easier
targets (budget slack), where they can under-promise, but over-deliver
c. Budgets should be challenging, but attainable ¢ Supports goal congruence and promotes employee
motivation
Use-it-or-lose-it
a. Some budgets include funds for specific expenditures or investments - if the funds are not used, then
they may not "roll forward" to the next period ¢ Creates an incentive to use the funds even if they may not
be necessary ¢ Leads to a goal congruence problem
Question:
6. Budgeting approaches
Answer:
Top-down: Advantages
- Time savings (less coordination)
- Incentives to be accurate (avoid slack)
Disadvantages
- Potential to overlook opportunities
- Information asymmetry
- Reduced employee morale
Participative (bottom-up): Advantages
- Team-based
- Greater employee commitment
- Greater motivation
- Better information
Disadvantages
- Incentives to create slack
Question:
7. Budget Horizons: Long-term VS Short-term VS Rolling
Answer:
Long-term: strategic
- less detailed
- focused on general approaches to achieving comp's strategies
- major capital investments and other actives necessary to peruse comp's strategy
Short-Term: operating
- more detailed
- enable mangers to understand what resources they will have available and what they need to do as they
work towards comp's objective
- 1 yr window, but usually broken into even smaller horizons (quarterly or monthly)
Rolling Budget:
- as one month is completed, another month is added
- with a 1 yr budget, as you get deeper into the year, we have fewer additional months of budget available
- ex: as march is completed, add on march of the next year to budget
