Budgeting and Control Flashcards
Top down budgeting
Budget set with overall corporate objectives by the senior management
Bottom up (participative)
Departmental objectives set by local management, given from bottom up
Advantages and disadvantages of bottom up
Advantage
- More realistic, as actual relevant experience
- Staff take ownership
- Greater motivation
- Saves time for senior management
Disadvantages
- Local objectives may differ from corporate objectives
- Scope for disagreement between staff
- Budgetary slack may be built in
- Budgets may be less accurate, as less experienced people creating them
Rolling budget
Advantages
Disadvantages
Budget establishes at the beginning of a period and constantly amended throughout
Advantage
- encouraging staff to continuous look at changing variables
- Times of uncertainty, better to be able to update information once it is known
Disadvantages
- Continually changing goals may demotivate staff
- not easily understood
- more time and effort
zero based budget
Advantages
Disadvantages
A budget that requires managers to justify every expenditure (including items accepted in previous periods). Managers include every possible expenditure in ‘decision packages’, Directors will then rank and approve the most important decision packages.
Advantages
- Responsive to changes in economic environment
- More efficient at allocating resources
- Drives managers to find cost effective improvements
- Detect inflated budgets
Disadvantages
- Time consuming to justify costs
- Need to rain managers to understand
Activity based budgets
Budget based off activity level and cost drivers Advantages - Focus on the drivers behind costs Disadvantages - Time consuming - Difficult to understand
Incremental budgets
ADV
DIS
Current budget or actual results adjusted for inflation and possible growth ADV - Stable and easy to understand -Quick impact of changes easy to see DIS - no incentive to reduce costs - encourages spending up to the budget
The master budget
Collates individual budgets from different departments into a consistent format used in annual accounts includes a P&L, balance sheet and cash flow.
Functional budget
Individual budgets for different functions (sales, production and labor)
Fixed budgets
Produced at the start of the year and doesn’t change until the next year
Flexible budgets
Produced at the start of the year and include different activity levels
Feed-forward and Feedback control
Feed-forward system = comparing the four cast results to the budget and taking corrective action when deviating from budget (cash flow budget - noticing an issue coming up and moving cash to cover)
Feedback system = budget versus actual (variance analysis)
Beyond budgeting
Hope and Fraser
Criticism of budgeting: Time consuming and expensive May have little value to users Does no focus on shareholder value Rigid and prevents fast response
High low methods
Fixed and variable costs can be analysed using the high low method
step 1 - select highest and lowest activity levels( and their known costs)
step 2 - calculate variable cots per unit ((total cost at high activity - total cost at low activity)/(high activity in units - low activity in units))
Learning effect
Time taken will reduce as task is performed competitively Y = ax^b a = time taken for first unit x = cumulative number of units produced b = learning factor (log LR)/log2 LR = the learning rate as a decimal
Standard costs
predetermined unit cost based on anticipated levels of efficiency and price
Standard cost assumption types
Basic - Nothing changed since standard was set before trading
Current - Current levels will be maintained
Attainable - Assume some improvement in efficiency and cost (motivating for staff)
Ideal - assumes optimum level of cost and efficiency (unrealistic)
Flexing budgets
Flexing current budget for actual volume of sales
Material variances
Either price variance or usage variance.
Usage variances - mix + yield:
Material mix variable - input variance
Material yield variable - output variance
Material mix variance
Difference between the standard mix of materials and actual mix of materials, values a the standard material cost
Materials yield variance
Difference between the actual output from materials used and the standard output
Sales mix variance
Difference between standard mix and of actual sales and actual mix of sales, valued at standard contribution
Sales quantity variance
Difference between actual sales volume and budgeted volume valued at contribution
Labour variances
Planning variance for labour rate = revised hours - original budgeted hours
Operational variance for labour efficiency = actual cost - revised budget cost
Total quality management (TQM)
Philosophy of continuous improvement to processors (goal to eliminate waste and efficiency
Sales price and sales volume
Sales price variance = (new selling price - old selling price) x revised sales volume
Sales volume = (new sales volume - original sales volume) x original standard contribution per unit
Operational sales volume variance is also considered the market share variance
