ACCA Applied Skills · Performance Management

Budgetary Systems and Types of Budget for ACCA PM

A budgetary system is the process a business uses to plan, coordinate, communicate and control through budgets. To answer PM questions, identify the budget type or approach in the scenario, state its purpose, then judge its fit using the facts given: advantages, disadvantages and the likely behavioural effect on managers.

What this chapter covers

This chapter covers how organisations build and run budgets. You start with why budgets exist: planning, coordination, communication, motivation, control and authorisation. You then follow the preparation process, including the principal budget factor, which is the resource that limits activity and so is budgeted first.

Next come the types and approaches. Incremental, zero-based and activity-based budgeting differ in how they set the starting point. Fixed, flexible, rolling and continuous budgets differ in how they treat activity levels and time. Participative, imposed and negotiated styles describe who sets the numbers. Beyond budgeting is a modern alternative to traditional budgets. The chapter ends with quantitative techniques used to build the numbers: forecasting, the high-low method and learning curves.

This chapter links to much of the rest of PM. Flexible budgets lead straight into variance analysis. Behavioural points feed performance measurement and reward systems. High-low and learning curves link to cost behaviour and decision-making. It may be tested in Section A and B objective test questions, and in Section C constructed response questions, which can involve calculations or a discussion or recommendation of a budgeting approach.

Budgeting is a core PM theme. It can be tested in objective questions and in Section C discussion or calculation parts. Objective questions test definitions, matching a scenario to an approach, and short calculations such as high-low or learning curves. Section C often asks you to discuss a budgeting method or its behavioural effects, and these marks come from applying points to the scenario, not from reciting lists. The topics are also fairly easy to master, so the effort pays back quickly, and the calculations give you reliable marks that carry over into variance analysis and decision-making.

Budgetary systems and types of budget: topics in the order to study them

1Purposes and Objectives of BudgetingEvery later method is judged against these purposes, so learn them first.
2Budget Preparation Process and Principal Budget FactorIt shows how a budget is built step by step and which budget comes first.
3Fixed, Flexible, Rolling and Continuous BudgetsThese types deal with activity and time, and flexible budgets underpin variance analysis later.
4Budgeting Approaches: Incremental, Zero-Based and Activity-BasedThese approaches set the starting point for each budget, so they build on the preparation process.
5Participative, Imposed and Negotiated Budgeting StylesOnce you know the methods, you can judge who should set the numbers and the behavioural effects.
6Beyond Budgeting and Other Budget ModelsStudy this after the styles because it compares traditional methods with modern alternatives and needs the earlier ideas.
7Quantitative Techniques: Forecasting, High-Low and Learning CurveThese calculation tools support budget preparation by helping you estimate costs and sales. You can study them as separate calculation skills, so you can start them alongside the other topics. Practise them often.

How to prepare Budgetary systems and types of budget

Split your time between knowing the ideas and using them. The calculations need practice. The discussion topics need scenario-based answers.

Learn the purposes of budgeting and be able to link each one to a real example, such as coordination between sales and production.
Draw the preparation flow from the principal budget factor through to the master budget, and practise spotting the limiting factor in a scenario.
Make a one-page comparison of each approach and type: what it is, when it suits, one advantage, one disadvantage.
For styles and models, practise linking points to the scenario, such as manager motivation, targets, information and the type of organisation.
Work the calculations by hand: high-low, forecasting and learning curve. Do several of each until the steps become automatic.
Do objective questions by topic, then mixed sets. Review every wrong answer and note the trap.
Practise one written Section C style answer: make a point, explain it, then tie it to the facts given.

Common mistakes in Budgetary systems and types of budget

Listing advantages and disadvantages without using the scenario.
Fix: Pick the points that fit the facts, name the fact, and explain the effect on the business.
Choosing the wrong principal budget factor or treating it as always sales.
Fix: Read the scenario for the real constraint, such as labour, materials or capacity, and budget from that.
Using the wrong points in the high-low method.
Fix: Choose the points by activity level, then take the cost at those points.
Misapplying the learning curve, for example applying the rate to the time of each individual unit instead of to the cumulative average time, or treating the rate as the percentage fall.
Fix: In the standard PM model, each time cumulative output doubles, the cumulative average time per unit becomes the learning rate (for example 80%) of its previous value. The fall is (100% − rate), so 20% for an 80% rate. Write the formula before you calculate.
Confusing rolling, continuous and flexible budgets.
Fix: Flexible budgets change with activity. Rolling and continuous budgets change with time, as periods are added.
Claiming participative budgeting is always best.
Fix: State the trade-offs: it takes longer and can create slack, so the best style depends on the organisation and its circumstances.

Last-day revision: Budgetary systems and types of budget

Budget purposes: planning, coordination, communication, motivation, control, evaluation and authorisation.
The principal budget factor is the resource that limits activity, and its budget is prepared first.
Incremental budgeting adds or subtracts a percentage to last period's figures, so it can carry forward inefficiency.
Zero-based budgeting starts from nothing and requires every activity to be justified.
Activity-based budgeting links budgeted costs to the cost drivers of activities.
A fixed budget does not change with activity, while a flexible budget is adjusted to actual activity.
Rolling budgets are updated regularly by adding a new period as one expires.
Participative budgeting involves managers in setting targets and can improve motivation, but may allow budgetary slack.
Imposed budgets come from the top, are quick to set, and may reduce commitment.
High-low: variable cost per unit = change in cost ÷ change in activity, using highest and lowest activity levels.
Learning curve: each time cumulative output doubles, the cumulative average time per unit becomes the learning rate of its previous value. For an 80% rate it becomes 80% of the previous value, a fall of (100% − rate) = 20%.
Beyond budgeting replaces fixed annual budgets with relative targets and adaptive planning.

Budgetary systems and types of budget practice questions

Budgetary systems and types of budget in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Budgetary systems and types of budget: frequently asked questions

What is the principal budget factor?

It is the factor that limits the organisation's activity, so it is the first thing you consider when preparing budgets. It is often sales demand, but it can be materials, labour or capacity. Other budgets are built around it.

What is the difference between incremental and zero-based budgeting?

Incremental budgeting starts with the previous period's figures and adjusts them. Zero-based budgeting starts from zero and asks managers to justify every activity and cost. Zero-based budgeting is more demanding but can remove wasteful spending.

How is this chapter tested in PM?

In the objective sections you may get definitions, scenario matching or short calculations such as high-low and learning curves. In the written section you may be asked to discuss a budgeting approach or its behavioural effects for a given business.

Do I need to memorise the high-low formula?

Yes, but understanding is better than memory. Variable cost per unit equals the change in total cost divided by the change in activity between the highest and lowest activity points. Fixed cost is then the total cost at either point less the variable cost.