Extra Shit To Remember Flashcards
Advantages of top down budgeting
Ensures best use of resources of the business
Operational managers may lack required skills
Senior managers greater control
Better grasp of bigger picture
Disadvantages of top down budgeting
Seniors lack local knowledge
Targets are unrealistic or unachievable
Poor use of senior managers time
De motivating to staff as they feel targets are imposed on them
Advantages of bottom up budgeting
Better local knowledge
Local managers will have better understanding of what is possible
Fred’s up seniors time
More motivating to staff
Lower managers get more involvement in company direction
Disadvantages of bottom up budgeting
Can be time consuming
Managers may lack required skills
Many conflicting views
Targets set could be too easy (budgetary slack)
Budgets may lack consistency between departments
What is negotiated budgeting?
Occurs in practice and is where the budgets are agreed between different levels of management. Department managers producing first draft which seniors review and amend. Then passed back and so on.
Advantages of incremental budgeting
Stable and changes are gradual over time
System is relatively simple to operate and easy to understand
Co-ordination between department
Disadvantages of incremental budgeting
Assumes activities and methods of working will continue the same way
No incentive to reduce costs
Encourages departments to spend full amount of their cost
Advantages of zero based budgeting
More efficient allocation of resources.
Eliminate budgetary slack
Cost effective ways to improve operations
Staff motivational by providing greater involvement
Disadvantages of zero based budgeting
Very time consuming as every single aspect needs to be justified
Managers may become demotivated at being forced to justify
Far more challenging to undertake than incremental
More difficult to administer the process and may affect communication
Advantages of rolling budget
Updating resource prices and demand levels gives up to date budget info
Always has lengthy time horizon
Encourages staff to look at changing internal and external variables
Disadvantages of rolling budgets
Involves time and effort as budget done on monthly basis
Constant change can demotivate staff
End of year can be hard to see which budgets to compare
What is activity based budgeting?
Find cost drivers and bases budget in these aspects
Advantages of activity based budgeting
Focuses managers attention on the true drivers, which could be controlled
Likely to be more accurate as looking at cost drivers
More efficient improvement programmes as whole cost of activity considered
Disadvantages of activity based budgeting
Time consuming and resource intensive
Not as easily understood by managers
What is priority based budgeting?
Modification of zero based
Focuses on priorities of company and allocated growth and savings accordingly
Based on ongoing review of activities
Elements of spending can be classed as essential/highly desirable/beneficial
What should the budgetary system encourage?
Honesty and transparency Motivation of management team Continuous improvement Goal congruence -common goal Reduce rivalry and suboptimal performance
What is forecasting?
Method used to predict what will happen in the future
What could you use to forecast sales?
Sales experts
Market research
Time series analysis
Linear regression
What could you use to forecast expenses?
Production and purchasing managers
Market research
Time series analysis and linear regression
Price indices
What is a time series?
A series of figures recorded over a period of time
What is the additive model?
Trend + Seasonal variation = time series
What is the multiplicative model?
Trend x Seasonal variance = Time series
What is linear regression?
Method used to forecast future costs or sales by looking at what has happened in past.
Assumes there is a reliable linear relationship
Assumptions and limitations of forecasting the trend using past data
Observations may not be typical of normal behaviour
Historic data may not predict future results
Assumes linear relationship
Predicting outside data range is less accurate
Reliability of trend depends on how well data fits
Many factors may affect variables
What is the Retail Price Index used for?
To inflate or deflate costs at different points in time for more meaningful comparisons.
4 ways to reduce uncertainty in budgets
Flexible budgets
Regular re-forecasting
Planning models -allows accurate predictions
Rolling budgets
What is the product life cycle?
The stages through which an individual product develops over time.
What are the 4 stages of product life cycle? And state what typical costs are
Introduction stage - high cost, low revenue
Growth stage - falling production cost with increased volume, increasing revenue
Maturity stage - high demand and sales but growth slows, reduced production costs
Decline stage - falling demand and market share means it is loss making
Why do we use a product life cycle in budgeting?
Helps forecast sales and costs depending on what stage it is in.
Market trends can be forecast in stable markets where product has long life
Competitor can affect forecast if new
Promotional activity should be considered as will affect sales
What are 3 problems with reliability of forecasts?
Historical data outdated
Unexpected events not factored in
Focus on historic data not future
What is a standard cost?
Used to estimate costs they are expecting to incur in advance of costs being incurred
What is ideal standard?
Perfect operating conditions with no allowance for waste, inefficiency or idle time
It is an impossible target
Demotviates
What is an Attainable standard
Realistic but challenging
Gives staff incentive to work hard
What is a basic standard?
Assumes nothing has changed
Become out of date therefore not meaningful
What is a current standard?
Based on current levels
Up to date but no incentive to improve
What are the uses of standard costs?
Planning - enables process of planning and to produce comprehensive cost budgets.
Control - forms basis of variance analysis
Advantages of standard costing
Makes budgeting quicker and more accurate if accurate one found as multiplied to required level
Useful for setting selling prices which cover costs
Used to set targets for individual staff
Makes measuring performance easier
Helps to value inventory of costs changes frequently
Disadvantages of standard costs
Time consuming to create and keep updated
If changes they can become out of date quickly
If wrong standard used it can demotivate staff
Difficult to establish standards if business does not have comprehensive cost info
What are the main steps in order to identify the optimal use of limited resources? (5)
1) identify limiting factor
2) calculate contribution per unit
3) calculate contribution per unit of limiting factor
4) rank products
5) work out optimal production plan
Advantages of subcontracting production
Greater volume of sales possible
May lower costs than providing ourselves if they achieve suitable economies of scale
Quality may be better - more specialised
Business can focus on core strengths
Disadvantages of subcontracting production
Lose control over process and quality
Lead times may be longer
Business can become too reliant on subcontractors
May limit access to finance
What is a flexible budget?
Drawn up at the beginning of the year and involves a series of budgets based on various different sale and production volumes
What should be considered before investigating a variance?(5)
The size of variance Controllability of variance Cost of investigating Interrelationships with other variances Trend
What are the two profitability ratios?
1) margin on sales
2) return on capital employee (profit in relation to investment
What is the return on capital employed formula?
Net profit
—————————- x 100
Capital employed
What is the current ratio? And what does it show
Current assets
———————
Current liabilities
Shows whether current assets can cover current liabilities
What does Quick ratio show and what is it?
Current assets - inventory
————————————-
Current liabilities
Shows truly if asssts cover liabilities by excluding inventory which could take time to sell
What are the three areas of NFPI’s?
Customer satisfaction
Productivity/efficiency
Quality
Examples of none financial performance indicators
Customer satisfaction
Number of customer complaints Levels of repeat business On-time deliveries made to customers Customer waiting times Market share
Productivity/efficiency
Number of units produced per labour hour Batch set-up times Number of suppliers used Percentage of idle labour hours Inventory holding days Machine capacity utilisation Daily output per employee Days lost due to staff absenteeism
Quality
Number of sales returned due to defects
Reject rates of production units due to defects
Percentage of output that requires reworking
Training time per employee
The sorts of NFPl’s that you would measure would be dependent on the industry that yoi
looking at. For instance, a provider of accountancy training courses may look at pass rates!
Benefits of nfpi’?
More forward looking leads to sustainable business
Long term targets will reduce focus on short term profit goals by reducing costs
Calculated quickly
Less scope for manipulation
Easily understood by non accountants
Managers can appraise many areas
Allows consideration of various important stakeholders eg customers
Using both FPI’s and NFPI’s gives balanced scorecard provides all round view. What are the 4 areas
/perspectives
Financial
Customer
Internal business
Innovation and learning
What would be the accounting treatment of repairs to delivery vehicles?
Allocate to distribution
Accounting treatment of salaries of stores department staff
Activity based charge to prodcuts
What are performance indicators important? WRITE THIS IN TASK 4
Important to monitor performance to check, control and compare budgets
In task 8 before anything else you must compare the …
Operating profit of original, flexed and actual
Health and safety course for direct production workers would be dealt with as what cost?
Charge to production on a labour hour basis
Performance indicators for quality control
Quality measures
- Units rejected at quality controls
- Returns by customers
- Number of customer complaints
- Customer repeat business levels.
