Budgeting and Control

Question 1

What are the 5 roles of budgetary system?

Answer 1

1) Planning
2) Control
3) Integration
4) Motivation
5) Evaluation

Question 2

What are 8 objectives of a budgetary system?

Answer 2

1) Compel Planning
2) Co-ordinate activities
3) Communicate activities
4) Motivate managers
5) Establish systems of control
6) Evaluate performance
7) Delegate authority
8) Ensure achievement of objectivise

Question 2

What are four examples of sources of information used in budget systems?

Answer 2

1) Internal historic information - internal records such as management accounts
2) External historic information - industry databases and government statistics
3) Internal anticipated information - strategic plans
4) External anticipated information - focus groups, market research and mystery shopping

Question 3

What is a top down budget?

Answer 3

Overall corporate objectives set by the senior management and then working down

Question 4

What is a bottom up (participative) budget?

Answer 4

Starts with individual personal and departmental objectives set by local mgmt and then works up through different levels of organisation.

Question 5

What are 5 advantages of bottom up budgeting (which are the disadvantages of top down budgeting)?

Answer 5

1) Set by people closer to action so should be more informed and realistic
2) Staff take ownership of budgets and targets and are more committed to achieving them
3) Greater staff participation leads to greater motivation
4) Doesn’t take up as much senior mgmt time
5) Encourages communication between departments

Question 6

What are 6 disadvantages to bottom up budgeting (advantages for top down budgeting)?

Answer 6

1) More scope for non-goal-congruent behaviour: Budgets fitting local objectives rather than corporate goals
2) More scope for disagreement between staff
3) Lack of overall coherence
4) More time consuming and costly
5) Budgetary slack may be built in
6) Budgets may be inaccurate if less experienced managers are in place

Question 7

What is a rolling budget?

Answer 7

A budget that is established at the beginning of a period and then constantly amended and extended

Question 8

Give two examples of when a rolling budget may be used?

Answer 8

1) At time so uncertainty surrounding resource/input prices, regular revisions to the budget will result in better information for control and decision making purposes
2) Encourage staff to be continually looking at changing internal and external variables

Question 9

What are three problems with rolling budgets?

Answer 9

1) Involves much time and effort
2) Concept is not readily understood by managers within an organisation
3) Continually changing the goalposts can lead to de-motivation

Question 10

What is a zero based budget?

Answer 10

Requires managers to justify every item of expenditure even if that item has been accepted in previous periods

Question 11

Give 7 uses a zero based budget provides?

Answer 11

1) Very responsive to changes in economic environment
2) Result in efficient allocation of resources as based on needs and benefits
3) Drive managers to find out cost effective ways to improve operations and identify opportunities for outsourcing
4) Detect inflated budgets. Identify and eliminate wastage and obsolete operations
5) Increase staff motivation by providing greater initiative and responsibility in decision-making
6) Increase communication and co-ordination
7) Force cost centres to adopt questioning attitude, identify mission and relationship to overall goals

Question 12

What are 9 problems with zero-based budgets?

Answer 12

1) Difficult to define decision units and decision packages, is very time consuming and exhaustive
2) Difficult to rank decision packages, especially if departments have different objectives
3) Some departments ( research and devel.) may find it more difficult to justify because outcomes are not short term
4) Need to train managers to understand
5) More managers are involved in process, difficult to administer
6) Volume of data may be so large that no one person can read it all
7) Honesty of mgmt must be reliable and uniform
8) Ranking process of decision packages could cause conflicts between departments
9) May prevent managers reacting to changed circumstances once budget has been set

Question 13

What is activity-based budgeting?

Answer 13

Initial work done to identify what the cost drivers are within the organisations activities, the required level of each activity is then identified and a budget produced on this basis.

Question 14

What are two uses of activity based budgets?

Answer 14

1) Focuses on true drivers behind costs within an organisation
2) Will enable more efficient improvement programmes to be implemented because it considers the whole of a cost generating activity

Question 15

What are 2 problems with activity based budgets?

Answer 15

1) Time consuming and resource intensive
2) Concept is not as readily understood by managers within an organisation

Question 16

What are incremental budgets?

Answer 16

Where budget of current period is used to anticipate for the forthcoming period by making adjustments for inflation and growth

Question 17

What are 6 uses of incremental budgets?

Answer 17

1) Budget is stable and change is gradual
2) Managers can operate their departments on a consistent basis
3) System is relatively simple and quick to operate and easy to understand
4) Co-Ordination between budgets is easier to achieve
5) Impact of change can be seen quickly

Question 18

What are 7 problems with incremental budgets?

Answer 18

1) Assumes activities and methods of working will continue in the same way
2) No inventive for developing new ideas
3) No incentive for reduce costs
4) Encourages spending up to the budget so that the budget is maintained next year
5) Budget may become out of date and no longer relate to level of activity or type of work being carried out
6) Priority for resources may have changed since budgets were set originally
7) May be budgetary slack built into the budget, which is never reviewed

Question 19

What is a master budget?

Answer 19

Collates individual budgets for business functions into format consistent with overall financial statements.

Question 20

What is use of master budget?

Answer 20

Provides overall picture of planned performance for budget period

Question 21

What is problem with master budget?

Answer 21

Not very helpful for mgmt control at detailed level

Question 22

What is a functional budget?

Answer 22

Budgets for each of the business functions of organisation

Question 23

What is use of functional budget?

Answer 23

Reflects organisational structure and responsibilities

Question 24

What is problem with functional budget?

Answer 24

Costs do not relate specifically to individual functions

Question 25

What is a fixed budget?

Answer 25

Main budget that is produced at start of year, based on anticipated level of sales and production

Question 26

What are two uses of a fixed budget?

Answer 26

1) Benchmark for control purposes 2) Highlight what can be achieved with expected level of resources

Question 27

What are two problems with fixed budgets?

Answer 27

1) not good as comparison in situations where the environment is changing rapidly 2) Not useful as performance appraisal basis if actual volumes of sales/production are different to what was expected

Question 28

What is a flexible budget?

Answer 28

Multiple budgets produced at the start of the year at different activity levels

Question 29

What is the use of flexible budgets?

Answer 29

Allow for changes in actual production and sales volumes

Question 30

What is the problem with flexible budgets?

Answer 30

Require detailed analysis of the organisations structures

Question 31

What 7 things can create uncertainty in budgeting?

Answer 31

1) Unforeseen changes in customer demand 2) Stronger or weaker competition 3) Technological advances 4) Under-performance by workforce 5) Breakdowns in machinery 6) Unforeseen changes in price or availability of materials 7) Inflation or exchange rate changes

Question 32

How are four ways a budget can deal with uncertainty in the environment?

Answer 32

1) Producing a range of possible outcomes - worst case, average and best case 2) Using past data and forecasting techniques 3) Reducing the uncertainty by using research techniques 4) Using expected value techniques

Question 33

What is a feedforward system?

Answer 33

Where forecast results are compared to the budget and adjusted for deviations - a cash flow

Question 34

What is a feedback system?

Answer 34

Compares actual events that have happened with an original budget

Question 35

What are 7 difficulties with changing a budgetary system?

Answer 35

1) Staff resistance to changes 2) Managers may struggle to interpret results - lack of control for a learning period 3) Motivational problems 4) Lack of staff knowhow and the need for retraining 5) Additional costs associated with implementation of new system 6) Lack of comparative information 7) Lack of systems and spreadsheets

Question 36

What are 10 criticisms of budgeting?

Answer 36

1) Budgets are time consuming 2) Budgets provide poor value to users 3) Budgets fail to focus on shareholder value - they focus on internally negotiated targets. There is no focus on maximisation of customer or shareholder value. 4) Budgets are too rigid and prevent fast response 5) Budgets protect rather than reduce costs - use it or lose it. 6) Budgets stile product and strategy innovation. 7) Budgets focus on sales targets rather than customer satisfaction 8) Budgets are divorced from strategy 9) Budgets reinforce a dependency culture - meet the budget, never beat it 10) Budgers lead to unethical behaviour - managing the 'slack'

Question 37

What are the two main concepts of beyond budgeting?

Answer 37

1) Focus placed on cash forecasting rather than cost control. Ties mgmt to predetermined actions, with targets being reviewed and based on stretching goals linked to performance against world-class benchmarks, competitors and prior periods. 2) Decision-making and performance accountability devolved to line managers and operational; staff creates a working environment and culture of personal responsibility.

Question 38

What are 8 benefits of beyond budgeting?

Answer 38

1) Faster response time - beyond budgeting is much more flexible 2) More innovation 3) Lower costs - managers see costs as items to be minimised rather than budgets to be spent 4) Performance targets are based on competitive success and more flexible 5) Greater motivation for managers because of devolution of responsibilities 6) Greater motivation for front line staff dealing with customers and suppliers 7) Better relations with customers and suppliers 8) Facilities improvements in information systems throughout the originations

Question 39

How do you find the variable cost using the high/low method?

Answer 39

(Cost at high activity level - Cost at low activity level) / (High level of activity units - low activity units)

Question 40

What is regression analysis?

Answer 40

The line of best fit on a graph

Question 41

What are 2 advantages of regression analysis?

Answer 41

1) Takes all pairs of data into consideration unlike high-low method 2) Gives statistically accurate link between the two variables

Question 42

What are 5 disadvantages of regression analysis?

Answer 42

1) It assumed a linear relationship between two variables 2) It does not consider that there are other factors affecting the variables 3) It assumes that historic behaviour patterns will continue into future 4) On its own, it does not make any adjustment for inflation 5) It is less reliable for predictions outside the data range

Question 43

What is correlation coefficient?

Answer 43

How close the line of best fit is to the actual variables - will always be between -1 and +1, if answer is 1, variables would be a perfect straight line

Question 44

What is coefficient of determination?

Answer 44

1) Indicates proportion of change in the dependent variable that can be explained by change in independent variable 2) Will always be somewhere between 0 and +1

Question 45

What are the four components of time series analysis?

Answer 45

1) Trend - underlying long-term movement over time in historic data 2) Seasonal variation - Short term fluctuations in historic data 3) Cyclical variation - long term fluctuations 4) Random variation - Unpredictable fluctuations - act of nature

Question 46

What is the formula for calculating forecast time series using the additive model?

Answer 46

Time Series = Trend + Seasonal variation

Question 47

What is the formula for calculating forecast time series using the multiplicative (proportional) model?

Answer 47

Time series = Trend * Seasonal variation

Question 48

What are two advantages of time series analysis?

Answer 48

1) Forecast will be based on identified patterns in historic data 2) The trend line can be continually updated after each future period occurs, enabling accuracy of predictions to be assess and improved

Question 49

What are three disadvantages of time series analysis?

Answer 49

1) It assumes the historic trend and the seasonal variations will continue into the future 2) It becomes less reliable if you go outside the ranges of existing observations 3) It assumes that a straight line trend exists

Question 50

What is the formula to calculate the learning rate?

Answer 50

A - cost/time of first batch/unit X - total number of batches/units produced b - Learning factor (log LR / Log 2) LR - learning rate as a decimal

Question 51

What four reasons will mean cumulative average time per unit will become constant?

Answer 51

1) Staff reaching physical limit 2) Staff being restricted by labour agreements 3) Staff being restricted by other resource limits such as machine time 4) Lack of incentives to improve further

Question 52

What is a standard cost?

Answer 52

Pre-determined unit costs based on anticipated levels of efficiency and price.

Question 53

What four things can standard cost be used to do?

Answer 53

1) Help to produce the fixed, flexible and flexed budgets 2) Compare with actual costs and hence as control technique 3) Motivate staff 4) Value inventories in the actual statement of profit or loss and statement of financial position as well as budgeted statement of profit or loss and statement of financial position

Question 54

What is a flexed budget?

Answer 54

Shows what the original budget would have looked like if it has been based on actual volume of production and sales

Question 55

What is a material mix variance?

Answer 55

Input variance - the difference between standard mix of materials and the actual mix of materials, valued at the standard material cost

Question 56

What is a material yield variance?

Answer 56

Output variance - difference between actual output from materials used and standard output, valued at standard material cost

Question 57

What is the usage variance?

Answer 57

Mix variance + Yield variance

Question 58

When might analysing sales volume variance be needed?

Answer 58

1) Complementary products (knives and forks) 2) Substitutes (tesco ketchup and Heinz ketchup) 3) Products produced using the same resources in a limiting factor environment

Question 59

What is the sales mix variance?

Answer 59

Difference between standard mic of actual sales volume and the actual mix of sales volume valued at standard profit/contribution

Question 60

What three things can cause a sales mix variance?

Answer 60

1) Downturn in economy, leading to customers becoming more cost conscious and preferring to purchase cheaper goods 2) Failure of marketing campaign to try and boost sales of more profitable item 3) Increased competition in marketplace for more profitable item

Question 61

What is a sales quantity variance?

Answer 61

Difference between actual sales volume (at standard mix) and the budgeted volume valued at the standard profit/contribution

Question 62

What are two causes of sales quantity variance?

Answer 62

1) An increase in the overall market size for the companys products 2) Good performance by the sales team in exceeding targets

Question 63

Formula to calculate planning variances for sales price?

Answer 63

(revised selling price per unit - original selling price per unit) * revised budget sales volume

Question 64

Formula to calculate planning variances for sales volume - market size variance?

Answer 64

(revised budget sales volume - original budget sales volume) * original standard contribution per unit