Budgetary Control Flashcards
What is feedback control?
Comparing actual (historical) results against a plan
Taking necessary control action
“Feedback is the comparison of actual results against expected results and if there is a difference it is investigated and corrected”
Performance Strategy (2011). P 493
Origins in systems theory
What is negative feedback?
Negative feedback – corrective action that brings actual performance closer to the target or plan
What is positive feedback?
Positive feedback – corrective action that increases the difference between actual performance and the target or plan
What is feed forward control?
Comparing planned results against a current forecast
Taking necessary control action
The forecasting of differences between actual and planned outcomes and the implementation of actions before the event to prevent such differences
Target costing is an example of feedforward control
Forward looking and proactive
Requires forecasts to be updated regularly
What is big data?
large volume of data, structured and unstructured
digital form
available to all, external to company
can be analysed to provide insights to lead to better decisions
Big data analytics = gathering, analysing and using of massive amounts of digital information to improve business operations
What are the benefits of big data in budgeting?
Help to answer questions regarding competitors, consumer tastes
Tracking trends
Better prepared for industry changes
Identifying non value added features in products
Relationship management can be improved
Customer needs measures
Business performance can be tracked
All this will help with budget preparation
What are the problems with big data in budgeting?
Volume – massive amount of data available. What to use?
Variety – no consistent wat the data is presented
Velocity – uploaded and updated constant
Veracity - fake news?
What is a fixed budget?
A fixed budget is a budget prepared for one level of activity
What is a flexible budget?
A flexible budget shows the same information i.e expected revenue and expenditure but for the actual number of units produced and sold or
A flexible budget shows the same information for a number of different levels of activity
Costs must be identified as fixed or variable
Only variable cost are flexed with volume
Fixed costs will remain the same regardless of the level of activity
Flexible budgets useful for planning and control
Flexible budgets can be used to evaluate actual performance, and provide much more useful variance information than a comparison of a fixed budget with actual results would provide
High-low method can be used to estimate costs
What is the high-low method?
Look at costs and volume of activity for a specific time period
Identify the highest volume of activity and its associated cost and lowest volume of activity and its associated cost
Variable cost per unit of activity is found by taking the difference between the high activity and low activity cost and dividing by the difference in volume
Fixed costs are then calculated by taking either the high or low activity costs and subtracting the variable cost
What is the controllability of costs?
Responsibility accounting is key aspect of budgetary control
Managers should only be appraised on costs they can control
Controllable costs – variable or directly attributable fixed costs, discretionary costs
Uncontrollable costs cannot be influenced by management – committed costs
What are the 4 behavioural aspects of budgeting?
1.Problems with budget objectives
Usually short-term in outlook and ignore the longer term
Focus on financial targets to the exclusion of non-financial issues
- Participation in budgeting
Top-down budget – a budget which is set without any participation from budget holders
Participative budgeting – a budgeting system where all budget holders are given the opportunity to set their own budgets
3.Management/office politics
Empire building
Use or lose it approach
Challenges goal congruence
- Budget slack
A deliberate over-estimation of expenditure and/or under-estimation of revenues in the budgeting process
