Budgetary control and Performance evaluation Keywords and Questions Flashcards
Management control system?
Helps to facilitate and increase goal congruence
What is a favourable variance budget?
When actual results exceed budgeted
What is unfavourable variance budget?
When actual results fall below budgeted
What is a static budget?
Prepared for only one expected level of activity
What is a flexible budget?
Adjusts to different levels of activity
What are responsibility centres?
Identifiable segments within an organisation for which individual managers have accepted authority and accountability
What does responsibility accounting involve?
Setting targets, measuring performance, analysing and acting on significant variances
What is a divisional structure?
A clear division of responsibility within an organisation
Decentralisation?
The delegation of freedom to make decisions
Centralisation?
The process by which decision making is concentrated within a particular location/group
What are the different types of responsibility centres?
Cost centre
Revenue centre
Profit centre
Investment centre
What is a cost centre and how is the performance evaluated?
A responsibility centre whereby managers have control over costs only.
Evaluated on ability to keep costs under control
What is a revenue centre and how is the performance evaluated?
A responsibility centre whereby managers have control over revenue
Evaluated on ability to generate/improve revenue
What is a profit centre and how is the performance evaluated?
A responsibility centre whereby managers have control over costs and revenue
Evaluated based on profits generated
What is an investment centre and how is the performance evaluated?
A responsibility centre whereby managers have responsibility over costs, revenue and investment
Evaluated based on relative profitability
What is the analysis for a cost centre?
Variance analysis
What is the analysis for a revenue centre?
Variance analysis
What is the analysis for a profit centre?
Variance analysis
What is the analysis for a investment centre?
ROI analysis
What are the issues with responsibility accounting?
What can/cannot be controlled by the manager is not always straightforward
Divisional conflict
What are the three types of financial performance measures?
ROI
RI
EVA
What does ROI relate?
The divisional profits to the investment or asset in the division
What are the divisional investment associated with ROI?
Total assets
Net assets
What are the three ways to increase ROI
Increase sales
Reduce expenses
Reduce assets
What does RI relate?
Divisional profits to investment and the cost of capital
What does RI ensure?
The organisational and managerial goals are better aligned
What are the advantages of financial performance measures (FPM)?
Cheap
Fair
Comparable and combinable
Allows for outsiders to assess the performance of divisions
What is the disadvantage of financial performance measures (FPM)?
FPM often encourages dysfunctional behaviour
