Chapter 3 - Budgeting and control

Question 1

What are the three advanced variances?

Answer 1

• Material mix and yield
• Sales mix and quantity
• Planning and operational

Question 2

What are planning variances?

Answer 2

The difference between the original standard and the revised one.

Question 3

What are planning variances due to?

Answer 3

Inaccurate forecasts or standards in the original budget setting.

Question 4

What are operational variances?

Answer 4

The difference between this revised standard and actual performance.

Question 5

What are operational variances due to?

Answer 5

The decisions of operational managers.

Question 6

What are the advantages of splitting variances into planning and operational elements?

Answer 6

Line managers can concentrate on improving operational matters for which they are genuinely responsible and accountable.

Question 7

What are the disadvantages of splitting variances into planning and operational elements?

Answer 7

• Too often all adverse variances are explained away as being planning errors.
• The revised standard is harder to achieve than the original one.

Question 8

Explain the weakness and limitation of the traditional approach to budgeting below.

Costly and time consuming

Answer 8

Finance teams spend far too much time on this arguably non-value adding activity.

Question 9

Explain the weakness and limitation of the traditional approach to budgeting below.

Focus is on short term results

Answer 9

There is a trade-off between the achievement of (short-term) budgetary targets and long-term value creation.

Question 10

Explain the weakness and limitation of the traditional approach to budgeting below.

Insufficient external focus

Answer 10

Organisational success will require consideration of internal and external factors.

Question 11

Explain the weakness and limitation of the traditional approach to budgeting below.

Top-down approach to strategy and decision-making

Answer 11

Strategies, decision-making and budgets may be imposed by senior management with limited involvement of those who are responsible for executing and achieving the plan set.

Question 12

Explain the weakness and limitation of the traditional approach to budgeting below.

Less suited to modern organisations

Answer 12

– Change is the new norm
– The importance of an empowered and adaptive organisation

Question 13

What is beyond budgeting?

Answer 13

The generic term given to the body of practices intended to replace traditional budgeting as a management model.

Question 14

What is the core concept of beyond budgeting?

Answer 14

The need to move from a business model based on centralised organisational hierarchies and control to organisations based on empowerment and adaption.

Question 15

Where are beyond budgeting approaches more commonly used?

Answer 15

Organisations that face…
- Regular environmental changes; and/or
- Where continuous improvement is critical to the organisation’s success.

Question 16

Give three examples where beyond a budgeting approach has been used in…

Governance and transparency

Answer 16

• Employees bound by mission and set of values rather than a central plan
• Governance is throuh shares values and sound judgement rather than rules and regulations
• Information is open and transparent, not restricted and controlled

Question 17

Give four examples where beyond a budgeting approach has been used in…

Accountable teams

Answer 17

• Network of accountable teams not restricted by centralisation
• High degree of freedom to make decisions and create value
• Teams responsible for relationship with customers and other stakeholders
• Budgets set at local level

Question 18

Give three examples where beyond a budgeting approach has been used in…

Goals, targets and rewards

Answer 18

• Managers given range of challenging but achieveable gaols relating to shareolder value (not just profit)
• Targets often based on external benchmarks
• Innovation and continuous improevement encouraged and rewarded

Question 19

Give three examples where beyond a budgeting approach has been used in…

Planning and control

Answer 19

• Planning is continuous and inclusive
• Rolling budgets may be used
• Focus on future events not past

Question 20

What are 6 advantages of beyond budgeting?

Answer 20

• The organisation is more likely to be proactive rather than reactive to changes
• Targets become more challenging and have a more external focus
• The organisation becomes more innovative and continuously improves.
• Managers are more involved in the decision making process (motivation and better decisions)
• Managers can take decisions much more quickly.
• It creates information systems which provide fast and open information throughout the organisation.

Question 21

What are 6 disadvantages of beyond budgeting?

Answer 21

• Planning, coordination and performance evaluation become more complicated
• If benchmarks and targets are viewed as being unachievable then effort to achieve them is reduced
• Although employees should be bound by a clear mission and set of values, sometimes organisational goals are less clear and are not communicated
• Organisations that move to a BB structure can often face a lot of resistance from staff and managers
• It may be difficult to adopt a decentralised approach
• The need for more up-to-date and accurate information requires costly investment.

Question 22

What are four forecast methods?

Answer 22

• Hi Low method
• Regression analysis
• Time series analysis
• The learning curve model

Question 23

What are four advantages of an incremental budget?

Answer 23

• Quick and easy and therefore low cost
• Assuming historic parts accepted, only incremental needs to be justified
• Avoids reinventing the wheel
• Works well when there is good cost control

Question 24

What is a way of getting around the time and cost requirements for a zero based budget?

Answer 24

Use it in a particular area of the business rather than the whole organisation

Question 25

What are the five basic variances?

Answer 25

* Sales price and sales volume * Material price and material usage * Labour rate, labour efficiency and labour idle time * Variable overhead efficiency and variable overhead expenditure * Fixed overhead expenditure and fixed overhead volume

Question 26

What is activity based budgeting?

Answer 26

Preparing budgets using overhead costs derived from activity-based costing.

Question 27

What are three things Operational Activity based management can do to improve performance?

Answer 27

- Reduce or eliminate activities that do not add value - Continually improve value adding activities - Identify design improvements

Question 28

What are three factors of a business that make it suitable for an incremental budget?

Answer 28

Stable - Costs not expected to change significantly Good cost control - Eliminating waste Limited discretionary cost - Inclusion should be justified, not automatic

Question 29

What are four advantages of activity based budgeting?

Answer 29

- Draws attention to costs of overhead activities - Recognises that activities drive costs - Can be used to identify CSF's - Useful for TQM

Question 30

What are two factors that make a an organisation suitable for rolling budgets?

Answer 30

- Accurate forecasts cannot be made i.e dynamic environment or new business - An area that requires tight control since RB's should be more realistic and accurate

Question 31

What is an advantage of flexible budgeting?

Answer 31

- Should enable better performance evaluation as comparing like with like.

Question 32

What are 5 advantages of a zero based budget?

Answer 32

- Resources allocated efficiently - Inefficient/obselete activities removed or altered - Increased staff involvement at all levels - Responds to changes in business environment - Knowledge of cost behaviour patterns enhanced

Question 33

What does Activity based management do?

Answer 33

Applies ABC principles in order to satisfy customer needs using the least amount of resources.

Question 34

What is a rolling budget?

Answer 34

One that is kept continuously up to date by adding another accounting period (e.g. month or quarter) when the earliest accounting period has expired.

Question 35

What are four disadvantages of rolling budgets?

Answer 35

- More costly and time consuming - Increase in budget work may lead to less control of actual results - Danger that the budget may be the last budget plus/minus a bit - Demotivating as target changing constantly

Question 36

What are six disadvantages of activity based costing?

Answer 36

- Costs might outweigh the benefits - Improssible to allocate all overheads to specific activites - Choice of cost drivers may be inappropriate - May be difficult to assign responsibility for cost pools - Limited benefit if costs are well controlled - Decisions made may not be tolerated by customers (think service removal at B&Q becuase lack of profitability)

Question 37

What are 6 disadvantages of activity based budgeting?

Answer 37

- Lots of tmie and effort requied to establish - Staffing issues i.e resistance to change or training cost - Cost of adapting information systems - Might not be appropriate for all organisations - Difficult to identify responsibilities - Could be argued that in short term many overheads are not controllable

Question 38

What are three factors of a business that make it suitable for Zero based budgeting?

Answer 38

- Fast moving/dynamic - High discretionary spend - Public sector (strict constraints)

Question 39

What are four advantages of rolling budgets?

Answer 39

- Planning and control based on more accurate budget - Better information on which to judge performance managament since they are short term - There is always a budget that extends for a fixed period - Forces management to take the budget process seriously

Question 40

What are three disadvantages of flexible budgeting?

Answer 40

- Perceived as moving goal posts resulting in demotivation - Hard to split costs into fixed and variable - In long run could be argued that all costs are variable

Question 41

What does Activity based budgeting do to prepare a budget?

Answer 41

Uses the costs determined in ABC to prepare budgets for each activity.

Question 42

What is the incremental budget sometimes viewed as?

Answer 42

The traditional approach to budgeting

Question 43

What is another name for a top down budget?

Answer 43

Non-participative budget

Question 44

What is the aim of activity based costing?

Answer 44

To calculate the full production cost per unit.

Question 45

What are 7 disadvantages of a zero based budget?

Answer 45

- Time and cost requirements far greater - May focus too much on short term benefits - Budget process may become too rigid and unable to react to unforseen changes - Need for management skills that may not be present in organisation - Demotivation due to large amount of time on budget process - Difficult to rank and compare different types of activities - Ranking may be subjective

Question 46

What is a fixed budget?

Answer 46

A budget that is prepared at a single level of activity

Question 47

What are 6 disadvantages of an incremental budget?

Answer 47

- Backward looking so less dynamic - Builds on previous problems - Doesnt encourage managers to control costs - Uneconomic activities may be continued - Managers may build in slack to make it easier to achieve - Managers may spend more to get more next year

Question 48

What is the aim of activity based budgeting?

Answer 48

To bring greater discipline to the process of budgeting for overhead costs

Question 49

What are four advantages of activity based costing?

Answer 49

- Provides a more accurate cost per unit - Provides better insight into what drives overhead costs reusltin in better cost control - Can be applied to all overhead costs, not just production - Can be used as easily in service costing

Question 50

What is Activity based management?

Answer 50

The use of ABC information to improve operational and strategic decisions.

Question 51

What is a risk of activity based management?

Answer 51

Some activities will have an implicit value that is not necessarily reflected in the financial value.

Question 52

What is a flexible budget?

Answer 52

- A budget that is prepared at a number of activity levels and can be changed to the actual level of activity - All costs are split into fixed or variable

Question 53

What are 5 methods of budgeting?

Answer 53

- Fixed and felixible budgets - Incremental budgets - Zero based budgets - Rolling budgets - Activity based budgets

Question 54

What is a zero based budget?

Answer 54

A method that requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time.