Week 10 - Budgetary control and performance evaluation

Question 1

Decision making loop/process

Answer 1

Question 2

Importance of a management control system (MCS)

Answer 2

Helps facilitate and increase goal congruence (harmony/synchronised)

Question 3

Characteristics of an effective management control system - when goal concurrence is achieved (3)

Answer 3

• Employees work in their own perceived best interests
• Make decisions that help meet the overall goals of the organisation
• Motivated employees towards company goals and the effort they put in

Question 4

Effective performance measures (5)

Answer 4

• Reflect key actions and activities that relate to the organisations goals
• Be affected by actions of managers and employees
• Be reasonably objective and easily measured
• Be used consistently and regularly to evaluate and reward
• Balance long term and short-term concerns

Question 5

Example of performance measures used to measure achievement

Answer 5

Question 6

3 financial measures of performance

Answer 6

• Operating budgets
• Profit targets
• Return on investments

Question 7

When does favourable variance occur?

Answer 7

• When actual results exceed budgeted (for profits and revenues)
• Vice versa for costs

Question 8

When does unfavourable variance occur?

Answer 8

• When actual results fall below budgeted (for profits and revenues)
• Vice versa costs

Question 9

What is a static budget?

Answer 9

Is prepared for one level of activity

Question 10

What is flexible budget?

Answer 10

A budget that adjusts to different levels of activity (also known as a variable budget)

Question 11

How is a flexible budget developed?

Answer 11

Managers determine revenue and cost behaviour (within the relevant range) with respect to cost drivers

Question 12

What is decentralisation?

Answer 12

The delegation of freedom to make decisions

Question 13

What is centralisation?

Answer 13

The process by which decision making is concentrated within a particular location or group

Question 14

Issues in divisionalised organisations

Answer 14

• Performance metrics
• Capital allocations
• Responsibly accounting
• Control versus autonomy
• Transfer pricing
• Goal congruent decision making

Question 15

Responsibility centres

Answer 15

Are identifiable segments within an organisation for which indivual managers have accepted authority

Question 16

Responsibility accounting

Question 17

Examples of responsibility centres

Answer 17

• Cost centres (variance analysis)
• Revenue centres (variance analysis)
• Profit centres (e.g product segment, local branch) (variance analysis)
• Investement centres (ROI analysis)

Question 18

Cost centres

Answer 18

• Managers have control over costs only
• Evaluated on ability to keep costs under control e.g cost variances
• Examples: manufacturing, IT & HR

Question 19

Revenue centres

Answer 19

• Managers have control over revenues (and very little or no control over costs)
• Evaluated on ability to generate and improve revenues
• E.g sales growth in marketing division

Question 20

Profit centres (2)

Answer 20

• Managers have control over costs and revenues (but not investments)
• Evaluated based on profit generated

Question 21

Investment centres (3)

Answer 21

• Managers have control over costs, measures and investment
• Evaluated on relative profitability
• E,g ROI, residual income, EVA etc

Question 22

Responsibility accounting issues (2)

Answer 22

• Controllability - in terms of what can/cannot be controlled
• Divisional conflict - may arise when self interested managers within the same company are expected to transact (I.e buy or sell) with one another