Chapter 7 : Accounting for Control

Question 1

How to control budget? 4 steps

Answer 1

1. prepare budget
2. collection information on actual performance
3. identify variances
4. respond to variances between planned and actual performance and exercise control

Question 2

Feedback control

Answer 2

when steps are taken to get operations back on track after deviation as soon as possible

Question 3

Feedforward control

Answer 3

predictions are made as to what could go wrong and preventative actions taken

Question 4

Reasons for adverse Sales Volume variance

Answer 4

1. poor performance by sales staff
2. deterioration of market conditions
3. lack of goods due to production process

Question 5

reasons for adverse sales price variance

Answer 5

1. poor performance of staff

2. deterioration of market conditions

Question 6

reasons for adverse DM usage

Answer 6

1. poor performance by production department
2. substandard material so high scrap
3. faulty machinery

Question 7

reasons for adverse DM price

Answer 7

poor performance by buying department
higher quality material than needed
change in market conditions

Question 8

reasons for adverse labour efficiency

Answer 8

poor supervision
low skill rate
low grade materials
problems with machinery 
dislocation of materials supply

Question 9

reasons for adverse labour rate

Answer 9

poor performance by human resource department
higher grader worker than planned
change in labour market conditions

Question 10

fixed overheads

Answer 10

poor supervision

Question 11

What industry is variance analysis more useful for?

Answer 11

Manufacturing, not service as unlikely to have DM costs etc

Question 12

How to decide what variance is significant?

Answer 12

managers choose, could use percentage threshold or fixed financial amount

Question 13

How can effective budget control be implemented?

8 points

Answer 13

1. serious attitude taken to the system
2. clear demarcation of areas of responsibility
3. challenging yet achievable targets
4. established data collection, reporting, analysis techniques
5. reports aimed rather than general
6. fairly short reporting period
7. timely variance report
8. action taken when things arent going to plan

Question 14

Behavioural issues with budgets

Answer 14

can improve job satisfaction and performance by offering structure and performance
demanding but achievable, otherwise adverse effect
should encourage participation of managers in target setting to improve motivation and sense of commitment

Question 15

Hopwood Study 1972 - 3 types of management styles

Answer 15

budget constrained - rigid focus, little thought given to other performance related things that could improve long term effectiveness
profit conscious - more flexible use of budget in conjunction with other data, aim to improve long term effectiveness
non-accounting style - budget information plays no sig role

Question 16

findings of hopwood study?

Answer 16

under budget constrained, more stress, poorer working relationships and more likely to influence budget

Question 17

Budgets aren’t really useful when:

Answer 17

subordinates undertaking tasks with high levels of uncertainty

Question 18

Two types of Standards

Answer 18

Ideal - assume perfect operating conditions, no inefficiency, helps employees strive for excellence
practical - not perfect operating conditions, account taken for defects, lost production time etc.

Question 19

Bullet points on Standards

Answer 19

Definition: planned quantities and costs of individual unit of input and output used for budgets
represent targets, provide basis for variance
set up after collective effort
do not provide useful basis for exercising control
may not motivate managers

Question 20

Points on Learning curve

Answer 20

• arrises when new task, doesnt matter whether skilled or unskilled labour
  takes less and less times until horizontal, diminishing marginal returns
  applies equally to service and maufacturing

Question 21

Problems with standard costing

Answer 21

• quickly out of date
• factors could influence that manager has no control over when variance analysis
• in practice, clear lines of demarcation difficult
• once standard met, no incentive to improve
• provides motives to act in undesirable ways eg excess inventories