L8: Budgeting pt2

What are the 3 levels in the performance hierarchy?

• Strategic (long-term, whole org)

• Tactical (mid-term, dept level)

• Operational (short-term, detailed control)

What kind of planning does most budgeting fall under?

Operational planning – short-term and detailed.

Why might a manager chasing monthly bonuses behave badly?

• Focus on short-termism

• High pressure → burnout or quitting

• Manipulation of results or budget slack

How can short-termism in budgeting be improved?

Use multiple targets (including non-financial) and align with long-term goals.

What is dysfunctional behaviour in budgeting?

When managers act against the business’s best interest due to budget pressure.

What are the 3 management styles in budgeting?

• Budget-constrained (short-term, high pressure)

• Profit-conscious (long-term, low pressure)

• Non-accounting (focus on quality/satisfaction)

What is budget slack?

When managers make budgets easier to hit by underestimating targets.

What are the 3 types of budget difficulty?

• Expectations (realistic, easy to achieve)

• Aspirations (stretching, motivating)

• Optimal (challenging but achievable)

How do you calculate a budget with growth and inflation?

Add % growth and % inflation to current figure.
Example: £800k + 10% + 6% = £932,800

What is incremental budgeting?

Adjusts last year’s figures for inflation/changes.

Give 1 pro and 1 con of incremental budgeting

✅ Easy and quick
❌ May promote waste or ignore big changes

What is zero-based budgeting (ZBB)?

Every cost must be justified from scratch, like it's brand new

When is ZBB best used?

In fast-moving orgs with lots of discretionary costs (e.g. public sector)

What is a rolling budget?

Continuously updated by adding a new period when one ends.

Key benefit and drawback of rolling budgets?

✅ More accurate & responsive
❌ Time-consuming and may cause confusion

What is ‘Beyond Budgeting’?

A move away from rigid budgets → flexible tools like rolling forecasts and KPIs.

What replaces budgets in Beyond Budgeting?

• Market-based targets

• Team decision-making

• KPIs

• Ethical info systems

Why is forecasting important in budgeting?

Helps create realistic assumptions and prepare for future decisions.

What is linear regression used for in budgeting?

To predict trends using past data (e.g. sales from marketing spend)

Key limitation of linear regression?

Only measures 2 variables, assumes linear trends, and poor for extrapolation

What is time series analysis?

Forecasting using trends, cycles, and seasonal variations in past data.

What are the 4 components of time series?

• Trend

• Seasonal

• Cyclical

• Residual

What’s the difference between additive and multiplicative models?

• Additive: add/subtract variation (e.g. +5 units)

• Multiplicative: apply % (e.g. x1.08)

What’s the formula to forecast using additive variation?

Trend + Seasonal variation = Forecast

What’s the formula to forecast using multiplicative variation?

Trend × Seasonal variation (as %)

What is an index number?

Shows change over time using a base value (usually 100)

How do you calculate an index number?

(Current value ÷ Base value) × 100

How do you use an index to forecast a value?

(Current index ÷ Base index) × Base value

What is Environmental Management Accounting (EMA)?

Tracks environmental costs to improve decisions and control impact.

What are some internal environmental costs?

Waste disposal, permits, energy usage, fines, decommissioning.

What are external environmental costs?

Harm to society like pollution, forest loss, health costs – not on the P&L.

How does EMA affect financial performance?

• Higher revenue (premium prices)

• Cost savings (efficiency)

• Risk of extra costs or fines

• Competitive advantage