Non-cash Budgets - Lecture 7a

Question 1

What should a budget inform staff of:

Answer 1

• Where the company is supposed to be (the destination)
• How it is going to get there (the route map)

Question 2

What is a budget?

Answer 2

A budget is an organisation’s operational plan for a specified period,
expressed in quantitative terms.

Question 3

6 Functions of budgets:

Answer 3

• planning
• co-ordinating activities
• communicating plans
• motivating managers
• controlling activities
• evaluating the performance of managers

Question 4

Master budgets cannot be drawn up until…

Answer 4

The sub-budgets for revenues (e.g. sales income) and for expenses (e.g.
stock, labour, overheads) are drawn up.

Question 5

Budgeting process:

Answer 5

1. construct the budget
2. co-ordinate the budget
3. implement the budget
4. control and review the budget

Question 6

Planning cycle:

Answer 6

• original forecast
• measure actual forecast
• analyse deviation from original
• feed new info into next forecast

Question 7

What are the 3 styles of performance evaluation

Answer 7

• budget contrained style (BC)
• profit conscious style (PC)
• non-accounting style (NA)

Question 8

Budget Constrained Style

Answer 8

“…, the evaluation is primarily based upon the cost centre head’s ability to continually meet the budget on a short-term basis. This criterion of performance is stressed at the expense of other valued and important criteria and a cost centre head will tend to receive an unfavourable evaluation if his actual costs exceed the budgeted costs, regardless of other considerations.”

Question 9

The Profit Conscious Style

Answer 9

Budgets provide targets for indicating whether performance is good or bad, but they are used in a flexible manner and viewed as just one indicator of a longer term concern with profits (e.g.
spending over the current budget period can be regarded as favourable if it results in higher than expected future profits).

Question 10

Non Accounting Style

Answer 10

“Accounting data play a relatively unimportant part in the supervisor’s evaluation of the cost centre head’s performance.”

Question 11

Budgeting as a political process:

Answer 11

1. Owing to scarcity of resources
2. Owing to differing power and conflicting preferences
3. Owing to organizational complexity
   * Budgets and organizational politics, e.g., Budgets are often political
   compromises; the result of political contests – and not always a
   rational allocation of resources
   * The budget system is moulded by organizational processes.
   (See Wilson and Chua, Managerial Accounting, pp.264-276)

Question 12

Performance evaluation at divisional / organisational level

Answer 12

Used by top management to evaluate divisional/ business units
Different type of units / divisions according to the level of ‘centralisation’:

• cost centres (cc’s)
• profit centres (pc’s)
• investment centres (ic’s)

Question 13

Cost Centres (CC’s) definition

Answer 13

High level of centralisation. Ability to meet costs is still the primary
performance measurement.

Question 14

Profit centres (pc’s) definition

Answer 14

Responsibility for meeting cost and revenue targets (and therefore profit
targets)

Question 15

Investment Centres (IC’s) definition

Answer 15

Responsibility as in PC’s plus autonomy over own capital budget (i.e can
make its own long-term investment decisions).

Question 16

Benefits of cost centres:

Answer 16

• Achieves consistency
• Avoids ‘maverick’ management
• Individuals given responsibility
  for achieving targets

Question 17

Drawbacks of cost centres (CC’s)

Answer 17

• Inflexibility
• Opportunity cost of senior managers time
• Middle managers don’t develop and feel constrained / controlled
• The budget becomes “the bible”

Question 18

Benefits of profit centres

Answer 18

• increased motivation, job satisfaction for some

Question 19

Drawbacks of profit centres

Answer 19

• achieving the culture change
• selling autonomy to theory X type staff

Question 20

Benefits of investment centres:

Answer 20

• senior managers manage: middle managers broaden their skill base
• increased speed of reaction - e.g. copycat brands

Question 21

Drawbacks of investment centres:

Answer 21

• finding appropriately skilled staff –> those prepared to think out of the box
• achieving goal congruence
• duplication - e.g. in R&D.