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10. Budgetary Flashcards

1
Q

What is fixed budget

A

Master budget - Set prior to control period
- Not changed in response to changes
- Acts as a benchmark in performance evaluation

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2
Q

What are the features of fixed budget

A
  • 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
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3
Q

What is a flexible budget

A

Budget designed to change as volume of activity changes by recognising different cost behaviour patterns

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4
Q

How are flexible budegts useful

A

Planning stage - for what if analysis to show different results from prossible activity levels

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5
Q

What is difference between flexible budget and flexed bduget

A

Flexible: designed at planning stage with varying levels

Flexed budget: revised budget that reflects actual activity levels achieved in budget period

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6
Q

What are the steps to prepare flexed/flexible budgets

A

1: Determine cost behaviour patterns - decide costs are fixed, variable or semi variable
2. Calculate budget cost allowance for each cost item

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7
Q

How are costs split based on cost behaviour in step 1

A
  • 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

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8
Q

How are semi variable costs split into fixed and variable componenets

A

Hihg low methods or scattergraph method

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9
Q

How do you calculate budget cost allowance

A

= Budgeted fixed cost + (number of units x variable cost per unit)

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10
Q

How useful are flexible budgets in modern environment

A

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
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11
Q

What is budget centre

A

A section of entitiy for which control may be exercised through budgets prepared

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12
Q

What features does a well organised system of control have

A
  • Hierarchy of budget centres
  • Clearly identified responsibilities for achieveing tagrets
  • Responsibilities for revenues, costs and capital purchase employed
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13
Q

Define responsibility accounting

A

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

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14
Q

What are examples of responsibility structures

A
  • 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
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15
Q

What is the controllability principle

A
  • Managers should only be held accountable for costs/revenues for which they have control so they remain
    -Motivated
  • Can take action
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16
Q

Define controllable cost

A

A cost which can be controlled by a cost/profit/investment centre manager
- Can be changed within a given period ( motsly variable)

17
Q

What are examples of how controllable costs can change

A
  • Controlllable by senior managers but not junior
  • Controllable in one department but not another
  • Controllable in long term not short
18
Q

How does controllability link to fixed costs

A
  • 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
19
Q

What is meant by dual responsibility

A

Particular cost might be slit between multiple managers
eg. raw material cost between purchasing and production
- reporting system must allocate responsibility appropriately

20
Q

What is feedback control

A
  • Comparing actual historical results against a standard or plan and taking control action where there is a variance
21
Q

What are examples of feedback control

A
  • 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
22
Q

What is feedforward control

A
  • 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
23
Q

What are limitations of feedback/forward control

A
  • 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
24
Q

What are reasons for negative reactions of budgetary control

A
  • 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
25
Q

What are the two methods of participation in budget settign

A

Top down budgeting: when budget targets are set by seniors and cascaded downwards to departments

  • Bottom down budeting: when budget process starts at relatively low level of management and submitted upwards for consolidation
26
Q

What are advantages of top down budgeting

A
  • LIkely to be quick
  • Avoid budgetary slack and budgetary bids
  • Utilise senior management awareness of resource availability
27
Q

What are the advantages of bottom up budgeting

A
  • They reflect views and expectations of operational managers with local knowledge
  • Morale and motivation improved through participation
  • Increased liklihood of achieving targets
28
Q

What is negotiated budgeting

A

Final budget is likley to be reached after negotiation between senior and junior management
- Budgeting is a bargaining process

29
Q

Define budgetary slack

A

When managers may build in slack into their budgets to protect themselves against anticipated future cost cutting programmes so variances will be favourable

30
Q

What are poor attitudes to setting budgets

A
  • Not enough time
  • Formal budget is too restrictive
  • Argue to base it of previous outcomes
31
Q

What are poor attitudes when putting plans into action

A
  • Put just enough effort to achieve rather than beat targets
  • Formal budget enfource rigidity and are not flexible
  • Short term planning and less focus on logner term
  • Minimal co-operation and communication between managers
  • Managers use up full budget even if not needed - ‘lose it or use it mentality’
32
Q

What are poor attitudes of use fo control information

A
  • Low priority of finance for operational managers
  • See control information as criticism
  • Budgets can be seen as pressure devices
  • Might not understand information
  • False sense of objectives
  • Flaws in system of recording actual costs
  • Timliness of informaiton
  • Demotivation due to uncontrollable costs/variances
33
Q

What are the drwabacks of using pay as a motivator

A
  • Formal reward and performance evaluation systems can encourage dysfunctional behaviour
  • Can be too challenging and might demotivate
34
Q

What is short termism

A

Excessive focus on short term at the expense of long term performance

35
Q

What are methods to encourage a long term view

A
  • Having realistic short term targets
  • Provide sufficient management informaiton
  • Evaluate managers’ performance in terms of contribution to both objectives
  • Linking managers’ rewards to share price
  • Set non financial targets
36
Q

What are some non financial factors which can reflect a company’s performance

A

Quality
Customer service

37
Q

What are ethical implications of budgeting

A
  • Competitive market: pressure to make profits can lead to unethical decisions
  • Government agency: budgets may be set for political gain
  • Subsidiary: internal politics mean some budgets for subsidiaries are more challenging than others - tax rates and policy differences
38
Q

Define budget cost allowance

A

The budgeted cost expected for the actual level of activity achieved during the period

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