10. Budgetary Flashcards
What is fixed budget
Master budget - Set prior to control period
- Not changed in response to changes
- Acts as a benchmark in performance evaluation
What are the features of fixed budget
- Used in planning stage to define broad objectives
Fixed: - Budget prepared on basis of estimated volume of production and estimated volume of sales but no changes are made for a different volume of production
- When actual volumes of production and sales are achieved- fixed budget is not adjusted
What is a flexible budget
Budget designed to change as volume of activity changes by recognising different cost behaviour patterns
How are flexible budegts useful
Planning stage - for what if analysis to show different results from prossible activity levels
What is difference between flexible budget and flexed bduget
Flexible: designed at planning stage with varying levels
Flexed budget: revised budget that reflects actual activity levels achieved in budget period
What are the steps to prepare flexed/flexible budgets
1: Determine cost behaviour patterns - decide costs are fixed, variable or semi variable
2. Calculate budget cost allowance for each cost item
How are costs split based on cost behaviour in step 1
- Fixed costs: remain constant as activity levels change
- Non fixed costs: divide each cost figure by the related activity level
If cost is linear variable cost: cost per unit will remain constant
If cost is semi variable, the unit rate will reduce as activity levels incrase
How are semi variable costs split into fixed and variable componenets
Hihg low methods or scattergraph method
How do you calculate budget cost allowance
= Budgeted fixed cost + (number of units x variable cost per unit)
How useful are flexible budgets in modern environment
Majority of costs are now fixed as:
- Wage costs are fixed due to basic wage and guaranteed hours
- Fixed plant costs are a high proportion of costs
- So flexible budgets are less useful
What is budget centre
A section of entitiy for which control may be exercised through budgets prepared
What features does a well organised system of control have
- Hierarchy of budget centres
- Clearly identified responsibilities for achieveing tagrets
- Responsibilities for revenues, costs and capital purchase employed
Define responsibility accounting
A system of accounting that segregates revenue and costs into areas of personal responsibility to monitor and assess the performance of each part of an organisation
- Associates costs with managers
- Distinguishes between controllable and uncontrollable costs
What are examples of responsibility structures
- Cost centre- cost decisions - standard variances
- Revenue centre - revenue decisions
- Profit centre- decisions over costs and revenues
- Investment centre- decisions over costs, revenues and assets
What is the controllability principle
- Managers should only be held accountable for costs/revenues for which they have control so they remain
-Motivated - Can take action
Define controllable cost
A cost which can be controlled by a cost/profit/investment centre manager
- Can be changed within a given period ( motsly variable)
What are examples of how controllable costs can change
- Controlllable by senior managers but not junior
- Controllable in one department but not another
- Controllable in long term not short
How does controllability link to fixed costs
- Committed fixed costs: not controllable in short term but are in long term eg. depreciation, rent
- Discretionary cost: cost within a particular period is determined by and altered by budget holder eg. advertising, R&D
What is meant by dual responsibility
Particular cost might be slit between multiple managers
eg. raw material cost between purchasing and production
- reporting system must allocate responsibility appropriately
What is feedback control
- Comparing actual historical results against a standard or plan and taking control action where there is a variance
What are examples of feedback control
- Variance analysis
- Positive feedback : actual is better than expected, control action to encourage deviation
- Negative feedback: actual is worse than expected, control action to get back to plan
What is feedforward control
- System operates by comparing planned results against a current revised forecast of what results will be
- Control action is triggered by differences between anticipated and planned results
What are limitations of feedback/forward control
- Allows errors to occur due to lag in event and corrective action
- If time delay is large, feedforward control is preferred
- Often both systems are used
What are reasons for negative reactions of budgetary control
- Managers who set the budget are not the ones that are responsible for achieving them
- Lack og goal congruence: goals of organisation may not coincide with personal aspirations of managers
- Control is applied at different stages by different people
