Chapter 3 - Budgeting and control Flashcards
What are the three advanced variances?
- Material mix and yield
- Sales mix and quantity
- Planning and operational
What are planning variances?
The difference between the original standard and the revised one.
What are planning variances due to?
Inaccurate forecasts or standards in the original budget setting.
What are operational variances?
The difference between this revised standard and actual performance.
What are operational variances due to?
The decisions of operational managers.
What are the advantages of splitting variances into planning and operational elements?
Line managers can concentrate on improving operational matters for which they are genuinely responsible and accountable.
What are the disadvantages of splitting variances into planning and operational elements?
- Too often all adverse variances are explained away as being planning errors.
- The revised standard is harder to achieve than the original one.
Explain the weakness and limitation of the traditional approach to budgeting below.
Costly and time consuming
Finance teams spend far too much time on this arguably non-value adding activity.
Explain the weakness and limitation of the traditional approach to budgeting below.
Focus is on short term results
There is a trade-off between the achievement of (short-term) budgetary targets and long-term value creation.
Explain the weakness and limitation of the traditional approach to budgeting below.
Insufficient external focus
Organisational success will require consideration of internal and external factors.
Explain the weakness and limitation of the traditional approach to budgeting below.
Top-down approach to strategy and decision-making
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.
Explain the weakness and limitation of the traditional approach to budgeting below.
Less suited to modern organisations
– Change is the new norm
– The importance of an empowered and adaptive organisation
What is beyond budgeting?
The generic term given to the body of practices intended to replace traditional budgeting as a management model.
What is the core concept of beyond budgeting?
The need to move from a business model based on centralised organisational hierarchies and control to organisations based on empowerment and adaption.
Where are beyond budgeting approaches more commonly used?
Organisations that face…
- Regular environmental changes; and/or
- Where continuous improvement is critical to the organisation’s success.
Give three examples where beyond a budgeting approach has been used in…
Governance and transparency
- 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
Give four examples where beyond a budgeting approach has been used in…
Accountable teams
- 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
Give three examples where beyond a budgeting approach has been used in…
Goals, targets and rewards
- 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
Give three examples where beyond a budgeting approach has been used in…
Planning and control
- Planning is continuous and inclusive
- Rolling budgets may be used
- Focus on future events not past
What are 6 advantages of beyond budgeting?
- 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.
What are 6 disadvantages of beyond budgeting?
- 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.
What are four forecast methods?
- Hi Low method
- Regression analysis
- Time series analysis
- The learning curve model
What are four advantages of an incremental budget?
- 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
What is a way of getting around the time and cost requirements for a zero based budget?
Use it in a particular area of the business rather than the whole organisation
What are the five basic variances?
- 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
What is activity based budgeting?
Preparing budgets using overhead costs derived from activity-based costing.
What are three things Operational Activity based management can do to improve performance?
- Reduce or eliminate activities that do not add value
- Continually improve value adding activities
- Identify design improvements
What are three factors of a business that make it suitable for an incremental budget?
Stable - Costs not expected to change significantly
Good cost control - Eliminating waste
Limited discretionary cost - Inclusion should be justified, not automatic
What are four advantages of activity based budgeting?
- Draws attention to costs of overhead activities
- Recognises that activities drive costs
- Can be used to identify CSF’s
- Useful for TQM
What are two factors that make a an organisation suitable for rolling budgets?
- 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
What is an advantage of flexible budgeting?
- Should enable better performance evaluation as comparing like with like.
What are 5 advantages of a zero based budget?
- 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
What does Activity based management do?
Applies ABC principles in order to satisfy customer needs using the least amount of resources.
What is a rolling budget?
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.
What are four disadvantages of rolling budgets?
- 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
What are six disadvantages of activity based costing?
- 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)
What are 6 disadvantages of activity based budgeting?
- 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
What are three factors of a business that make it suitable for Zero based budgeting?
- Fast moving/dynamic
- High discretionary spend
- Public sector (strict constraints)
What are four advantages of rolling budgets?
- 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
What are three disadvantages of flexible budgeting?
- 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
What does Activity based budgeting do to prepare a budget?
Uses the costs determined in ABC to prepare budgets for each activity.
What is the incremental budget sometimes viewed as?
The traditional approach to budgeting
What is another name for a top down budget?
Non-participative budget
What is the aim of activity based costing?
To calculate the full production cost per unit.
What are 7 disadvantages of a zero based budget?
- 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
What is a fixed budget?
A budget that is prepared at a single level of activity
What are 6 disadvantages of an incremental budget?
- 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
What is the aim of activity based budgeting?
To bring greater discipline to the process of budgeting for overhead costs
What are four advantages of activity based costing?
- 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
What is Activity based management?
The use of ABC information to improve operational and strategic decisions.
What is a risk of activity based management?
Some activities will have an implicit value that is not necessarily reflected in the financial value.
What is a flexible budget?
- 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
What are 5 methods of budgeting?
- Fixed and felixible budgets
- Incremental budgets
- Zero based budgets
- Rolling budgets
- Activity based budgets
What is a zero based budget?
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.
