Levture 7

Question 1

Agents have more knowledge or specific skills (information asymmetry) but own interests:

Answer 1

More more money > less money
Leisure > work
Principals need to buy work (effort) from ages

Question 2

Information assymetry: moral hazard

Answer 2

Behaviour by one party considered inappropriate by the other party’s, after a contract has been made eg an increase in taking risks by a that b bears

Question 3

Information assymetry: (adverse) selection

Answer 3

Agents might self select based on incentive contracts

Management accounting can also be about controlling / directing selection processes:
Risk preferences
High incentivised work contracts
Target setting

Question 4

Information assymetry: classification

Answer 4

One side with more / better / superior information and the opportunity to exploit this advantage

Ex ante (before contract) hidden characteristics or intentions like job training adverse selection

Ex post (after contract) hidden action (moral hazard)c hidden info

Management accounting if often about understanding these problems and desfinying a control system to prevent negative effects of information assymetry

Question 5

Information assymetry: counter meausres

Answer 5

Reduction of info asymmetry or negative consequences thereof

Signalling: costly signals attractive for good and unattractive for bad participants
Certificates, diplomas

Screening:
Health checks
Pay experts to check used cards

Monitoring:
Surveillance
Spot checks

Measures to deal with information asymmetry costly

Question 6

Responsibility accounting

Answer 6

Responsibility accounting is evaluating the performance of managers based on activities under their supervision

4 centers:
Cost center - responsible only for costs
Revenue center - responsible only for revenues
Profit center - responsible for revenues, costs and profits
Investment center - responsible for revenues, costs, profits and investments

Question 7

Definition of a budget

Answer 7

A budget is the quantitative expression of a company’s action plan

Question 8

Master budget includes:

Answer 8

A master budget includes operating and financial planning

Operating planning is how to use (scarce) resources
Financial planning: how to get funds to acquire resources

Question 9

Functions of budgeting

Answer 9

Planning and coordination
Motivation and performance meausremnt
Communication of gold and strategy
Decision facilaiting and decision influencing

Question 10

Budgeting cycle

Answer 10

Planning the performance of the organisation > frame of references; a set of specific expectations against which actual results are compared > analysis of variances > correcting actions

Question 11

Criticisms of budgeting practices

Answer 11

Budgets take too much time to prepare;

Budgets impede adaptability (how to deal with unforeseen opportunities or challenges)

Budgets as fixed performance contracts (should targets be subjectively adjusted ex post / at the end of the period)

Budgets are disconnected from firm strategy

Question 12

Master budget: modern approaches

Answer 12

Computer based financial planning models: what if analyses

Kaizen budgeting - incorporating continuous improvement into the budget numbers during the budget period

Activity based budgeting - focuses on the budgeted cost of activities
Forecast production volume > activities > costs

Question 13

Operating budget contains

Answer 13

Revenue budget 
Production budget in units 
Direct mat purchase budget 
Direct labour budget 
Cost of goods sold budget 
Supporting budget schedules 
Non manafacturing cost budget 
Budgeted pl statement

Question 14

Financial budget

Answer 14

Capital budget: which long term projects to finance
(Identify investments / choose investment)

Cash budgets liquidity planning
(Available cash = beginning cash balances less minimal cash balances)

Budgeted balance sheet

Budgeted statement of cash flow

Capital budget > cash budget > budgeted balance sheet > budgeted statement of cash flow

Question 15

Building an operating budget

Answer 15

Reveneu budget > production budget > non man costs budget > budgeted p&l

Question 16

Building operating budget; reveneu budget
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 16

Revenue budget:

Sales volume (units) 10,000
Sales price 240
Revenue 2,400,000

Question 17

Building an operating budget: production budget - production volume

Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 17

Opening stock (-800)
Sales volume 10,000
Target closing stock 500
Production volume 9700

Question 18

Building an operating budget: production budget - direct mat Usage

Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 18

Dm usage per unit, kg 3
Production volume units 9700
Dm total usage kg 29100

Question 19

Building an operating budget - production budget - direct mat purchase

Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 19

Dm total usage 29,100
Price per kg of dm 20
Dm total purchase costs 582000
Dm costs per unit (9700) 60

Question 20

Building an operating budget - production budget - direct labour

Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 20

Production volume (units) 9700
Dl hours per unit 1,2
Dl total hours 11640
Dl costs per hour 49
Dl total costs 465600
Dl costs per unit 48

Question 21

Building an operating budget: production budget- manafacturing oh

Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 21

Production volume (units) 9700
Var oh per unit 30
Total var oh 291,000
Total fixed oh 500,000
Total fixed per unit 51.55

Question 22

Building an operating budget - production budget - closing stock

Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 22

Dm per un it 60
Dl per unit 48
Var oh per unit 30
Fixed oh per unit 51.55
Total cost per unit 189.55
Target closing stock value 94775

Question 23

Building an operating budget: production budget - cogs

Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 23

Assumption FIFO for finished goods

Opening stock units 800
Total costs per in our 180
Cogs op stock 144,000
Current production units 9200
Total cost per unit 189.55
Cogs (current production) 1,743,860
Cogs (value) 1,887,860

Question 24

Building an operating budget- non man costs budget

Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 24

Sales volume (units) 10,000
Var non man oh per unit 0.25
Var non man oh total 2500
Fixed non man oh 300,0000
Totaal operating expenses 302500

Question 25

Building an operated budget A budgeted p&l

Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion

Answer 25

Revenue 2,400,000
Cogs (-1887860)
Open (302500)
Op income 209640

Question 26

Budgeting: getting info

Answer 26

Agency conflict: headquarters (principe) va local managers (agent)

Headquarters need to delegate and give up power In order to get local info

Headquarters expects managers to error honestly / theie true expectation

Local managers may have knowledge or info, but own interests:
More money > less money
Leisure > work (effort costs)

Question 27

Budgeting and participation

Answer 27

Top down approach: centra determination of budgets based on data From strategic planning
Only fine tuning on lower, decenteralsied levels

Bottom up approach: composing of budgets on lower, decenteralised levels
Compiling on central headquarters level

Mixed approach: interaction and iterations between headquarters and decentral units

Question 28

Honesty in reporting

Answer 28

Agents (ie lower level managers) with info advantage and Incentives not to report honesty : slums makes life easier

Eg managers asked about planned use of overhead resources
Consequences: wrong planning of oh resources

Dishonesty can lead to errors in the planning of resources and the reporting system and potentially inflated compensations costs

Question 29

Honesty in reporting

Answer 29

Managers not often completely honest, but rarely lie to the extreme

Managers trade off ficnanal games with self image of being moral

Managers distort report to implement csr projects

Managers are rather willing to lie when another person profits

Question 30

Motivational aspects of participation

Answer 30

Participation often considered as a good way to increase motivation (and performance) eg having a voice, involvement and identification

However participation can have negative effects on motivation (and performance)
Can be lengthy and frustrating to allow for different opinions
Possibility of open conflicts in negotiations
Low acceptance of budgets
Participants might feel that their input for unduly ignored