Naratives Flashcards
What are the behavioural issues that should be considered when designing a budgetary system
The budget is a critical component in the financial management’s ability to plan and control the organisation’s financial activities. allowing us to set targets and allocate resources.
Controllability:
this refers to the extent to which a manager is able to control the outcome of budgetary decisions, if the manager does not have control over the system then it may not be a meaningful measurement of performing them as managers. for a budget to be effective it should focus on controllable costs such as order value, sales, and labour efficiency not something like losses through damages as this is largely out of their control
Participation:
this section relates to the involvement of individuals in the budget process, involving employees in the process can improve their commitment and motivation towards the targets, additionally, they can aid in identifying opportunities that may be missed by upper management.
Participation needs to be balanced, if there is too much participation this can result in lengthy discussions as well as slow decision-making, as well as those at the lower level may not have the experience or knowledge to understand what is best for the organisational goals.
Target setting:
this aids in allowing the organisation to achieve its goals, it should consider resources available as well as historical data and external factors such as the economic climate and competition. these targets should be communicated effectively to employees with a monitoring system in place to track the progress of the targets
the organisation should be aware that unattainable targets can have a negative impact on the business such as demotivating employees and undermining confidence. it is therefore important that the business is careful in setting targets.
What is a top-down approach and what are the advantages and disadvantages of this approach
A top-down approach to budgeting is where the budget is set by those from the top and is passed on through the organisation, similarly, the company’s approach to evaluating managerial performance should be based on the ability to meet these targets
advantages:
the primary benefit of this approach is that it can provide a clear alignment of goals and objectives across the business. it allows upper management to be able to communicate their visions to the day-to-day managers in the business. it also saves time and resources as it eliminates the need for managers to develop their own budgets and targets
Disadvantages:
the main disadvantage is the fact that it ignores the lower levels of the business and may impose targets that are deemed unattainable and lead to frustration and disengagement, additionally, the approach may not be able to accommodate changes in the business environment or any unexpected costs
What are bottom-up approaches and the advantages and disadvantages these approaches
Contrary to a top-down approach this approach starts at the department level and moves up through the ranks to the upper management levels, each department should budgeted for what the believe they will need over the coming year and the managers are required to give their input on the budget
Advantages
This allows businesses to have better accuracy and accountability of their budget. As the costs will be set by those who are close to the process this gives us the best understanding of the costs and resources that are needed for each department. This can also give us better employee motivation as the budget will stem from those at the lower levels. This can aid in making employees more motivated to achieve the organisation’s goals as they feel like they are playing their part In the overall business goal.
Disadvantages
Even though having more control of the budget at the lower levels can mean more motivation it can lead to a lack of regard for other departments and may not take into account upper management insights that could provide guidance in incorporating others in the budgets. As well as this the budget is being created by the least experience in the organisation who may not be able to incorporate the goals of the entire organisation or fully be able to comprehend the consequences of the decisions made, finally this process will require a lot more approvals as it goes through lots people which could result in lots more conflicts across all of the boards
What is incremental budgeting and what are the advantages and disadvantages of this approach
This is when we have our current budget or performance as our bases with an incremental amount being added depending on a number of factors such as inflation, increase in sales, costs etc.
Advantages
This process is simple and by that nature, it is quick and easy to prepare for and can therefore be prepared more regularly if need be, in part of this it is easy to understand and has lower preparation costs. It can also aid in reducing conflict between departments as the approach is consistent across the organisation.
Disadvantages
The first disadvantage is that it assumes that all of the current activities are needed by examining them in detail, as well as this there does not need to be the same level of justification as the costs have already been considered necessary and therefore increasing it will at the very least be slightly above what is absolutely necessary. There is no incentive for the business to try and reduce costs and they may be spending money for the sake of it as if they do not spend the cash it will be deemed unnecessary. This type of budgeting is often unchallenging and as the performance is based on past performance and therefore does not look forward to any goals.
What is activity-based budgeting
This is the process of recording and analysing activities that lead to costs for the company, with every cost being scrutinised for potential ways in which the process can be more efficient on which the budget is then based.
Advantages
This system allows for larger control over the budget process as the planning is done on a precise level that can provide beneficial insights in regard to projections. This can allow for greater control that can help to align the budget with the overall company goals. The main goal of this process is to make the business more efficient in regard to sales and costs and therefore the aim is towards higher profits which are aligned with the shareholder wealth. As there is a lot of information gathered on the operations of the business it makes it easier t track the activity performance and hold employees accountable for processes
Disadvantages
As this process requires a lot of control to record these costs on which it is based there are a lot more costs in place to maintain this process, as well as the process of reviewing and implementing this data is a lot more extensive. Developing this requires a deep understanding of the business and therefore requires a lot of skill to develop. This type of budgeting is only really sorted for short-term goals and is less sustainable with businesses with long-term objectives
What is Zero-based budgeting and what are the advantages and disadvantages of this approach
This is a more restrictive approach that looks forever for expenses to be justified before they can be added to the new budget and this is regardless of whether the expenses is old or recurring.
Advantages
The main advantage of this is accountability as all of the costs must be justified forcing managers to consider whether these costs are necessary. Unlike incremental costs, this method keeps legacy expenses in check as traditional methods may not examine these expenses for years until there is an economic shock. Expenses can grow over time and therefore this can stop the misallocation of resources.
Disadvantages
This type of budgeting can rewards short-term thinking as costs might not be justified in the current period but may be necessary for future periods where costs may be greater. As all of the costs need to be justified and reviewed this requires a lot of resources and can therefore complicate and prolong the period of preparing the budget. This type of budgeting can also lead to manipulation by managers in order to get more resources in their budget misaligning the organisation’s goals
What is Kaizen budgeting and what are the advantages and disadvantages of this approach
this is the practise of continually improving processes and reducing costs, the process leads to gradual improvement over a long period of time, this concept is applied by incorporating expected costs reductions into planned business results. It aims to drive down costs below their current levels on a continual basis
Advantages
This cost-cutting will also aim to minimize costs and increase efficiency, which helps to improve the product quality and productivity of the operations. This is a flexible technique that can apply to and production process whether it is a service or production. As the goal of this is to reduce costs it can aim to improve the culture of the business and helps to keep the business on track with goals. It also encourages communication through the business
Disadvantage
It may be easier to make cost-cutting reductions in the earlier periods while there is more obvious cost-cutting areas but after a couple of years, the cost reductions may decrease which can put pressure on managers to reduce costs even more. If the budget can not be remotely achievable, then there can be considerable unfavourable variances from the budget. The budget may ignore broader organisational issues due to the intensity on cost-cutting
Discuss the limitations of the company’s cost plus approach
cost plus approaches involve adding a markup to the cost of goods and services in order to arrive at a selling price.
advantages:
this is a simple approach to pricing and is easy to set out costs and budget for margin, it is also justifiable as in the case of a price increase we can point to the increases in cost as a reason of pricing increasing
Disadvantages:
this approach ignores how the market is affecting the pricing and may find that they are under/over pricing in comparison to competitors which can have. major impact on the market, this appraoch ignores any product cost overruns that could occur.
Discuss the usefulness of conducting ex post variance analysis.
Ex-post variance analysis looks at historic returns in order to determine future risks, this can allow investors to be able to determine the maximum potential risks (Loss) of their investments given that there are no surprising circumstances. By using reliable data from past events we are able to gain more of an accurate representation of what the future may hold for our assets. The downside of this is that past events could have been impacted by factors that are no longer relevant.
Critically assess the effectiveness of using traditional measures such as Return on Investment and Residual Income for divisional performance measurement.
Traditional measures such as Return on Investment (ROI) and Residual Income (RI) have been widely used for divisional performance measurement. However, their effectiveness in evaluating a division’s performance has been a topic of debate among academics and practitioners.
One of the major advantages of using ROI and RI is their simplicity and ease of use. Both measures are easy to calculate and can be easily understood by managers, which makes them popular for performance evaluation purposes. Additionally, ROI and RI are also useful in identifying which divisions or business units are generating more profits and which ones are not. As a result, managers can use these measures to allocate resources more effectively among divisions and improve overall company performance.
However, there are also several limitations to using ROI and RI for divisional performance measurement. One major limitation is that both measures tend to focus on short-term results rather than long-term goals. This is because ROI and RI are based on financial measures, which do not consider other important factors such as customer satisfaction, employee engagement, and innovation. As a result, managers may make decisions that benefit short-term financial results at the expense of long-term growth and profitability.
Another limitation is that ROI and RI can be easily manipulated by managers. For example, managers may use accounting tricks to increase profits or reduce expenses in order to improve ROI and RI. This can lead to distorted performance measures that do not accurately reflect a division’s true performance. Moreover, ROI and RI can also be affected by external factors such as changes in the economic environment or changes in accounting standards, which can make it difficult to compare performance over time.
In conclusion, while ROI and RI are useful measures for divisional performance evaluation, they should be used with caution. Managers should consider using additional measures that take into account non-financial factors such as customer satisfaction and employee engagement to provide a more comprehensive view of a division’s performance. Additionally, managers should be aware of the limitations of ROI and RI and take steps to mitigate their potential biases and limitations.
Discuss the limitations of the company’s cost plus approach for external pricing decisions and consider the benefits of techniques such as relevant costing, target costing, life cycle costing and customer profitability analysis for informing pricing decisions.
Cost plus approach is the process of determining our costs for the business and then simply adding a markup onto it, this is a nice and simple approach which is easy to calculate and takes very little skill to achieve, as well as this it is easily justifiable as if prices increase they can simply be linked back to cost of sales which are out of the control of the company. This approach however does ignore market demand which could relate to the product being grossly under/overvalued have a significant impact on the overall market shares of the company. As well as this the approach predicts that the costs to the company will be consist and does not plan for any changes in costs.
Relevant costing - is the principle of looking at what costs will be incurred differently if we choose to go with an alternative model. for example regardless of how we choose to target our pricing the costs of bills and rent will be the same regardless and therefore these figures should not be considered in our decision making
Target costing - this is the process in which we plan in advance to get an understanding for the demand for the product and the wants of the customers before the product is produced, this allows us to estimate a price point in which we believe consumers are willing to pay and then from there we can decided what margin do we want/believe is possible to have attached to our product, from there we then work with suppliers in order to generate a products that will allow us to hit our desired costs of the product. This process allows management to continually improve the product and looking to innovate in order to get a gain on the competitive market. as well as this the method can create a more customer centric business model with the pricing start right from what the company believes would be something that the consumer would pay. it is also worth noting that this approach actively touches on economies of scales.
the limitations of this approach can mean that it is a very lengthy and costly process and can often lead to potential conflict due to all of the participating companies. this methodology can sometimes lead to companies going with inferior products as a result of meeting costing targets.
Life cycle costing - this is the process of compiling all of the costs the asset over its lifetime and making an informed decision on how to best manage the asset in order to ensure that the costs are as low as possible so that you can make the product can be competitively priced. this can led to the asset having an overall better asset condition, longer life and fewer risks.
Customer profitability analysis - this does what it says as we are analysing how profitable consumers are to our business and determining how vital it is to keep a customer on. for example if you have a betting company that can offer free bets, if the consumer only comes back for free bets and is not likely to return on there own terms then giving the these free bets will only cost the company that the consumer is not worth investing in but if you can determine that someone will return then the potential of handing out free bets can in the long run result in much larger returns, this can allow us to ensure that we are marketing to the right sector and put in place a system that sees consumer retention and to enhance our operational efficiency
What is a Kaizen costing approach
This is where we aim to make continuous improvements to our product with small incremental reductions in costs. This will see the company producing cost targets that they will aim to meet every month.
Advantages - This method allows for the ideology that there is always way to improve the product and encourages proactive cost management
Disadvantages - In general it can be difficult to see what and how the product can be improved. Just because a company believes that it can reduce costs, it does not always mean that the employees will buy into this ideology
What is Market skimming pricing strategies
this is when the product sets a high introductory price to attract buyers that have a strong desire for the product and resources to buy it, the price of the product is reduced to attract the next layers of the market - Take the PS5 which is still at extreme highs even given that the product has been out for a few years
What is Penetration pricing strategies
This is the opposite to market skimming where we enter the market at a lower price in order to gain new customers in the market and make them aware and build up brand love. Once the customers are attached to the product we rise the product back up to normal levels, this would be like offering a free months subscriptions followed by full prices
What is peak load pricing stratergy
This is a form of congestion pricing where customers will pay an additional fee during period of high demand which can also be known as surge pricing - For example if you ride any form of public transport they will charge higher costs at periods with higher demand known as on-peak
What is a loss leader pricing strategy
This is slightly different to penetration pricing where we have a product that is being sold at a price that is not sustainable, this is done in order to again attract new customers but is done so in the hopes of securing future recurring revenue
