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ACCA Performance Management > Chapter 10: Budgeting > Flashcards

Chapter 10: Budgeting Flashcards

1
Q

What is a budget?

A

Quantitative plan for a specific time period
Normally financial and prepared for one year
Benchmarks vs actual (variance analysis)

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2
Q

What is the purpose of budgeting

A

planning
control
communication
co-ordination
evaluation
motivation
authorisation
delegation

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3
Q

What is planning

A

forward looking
management don’t rely on ad hoc/ poorly co-ordinated planning

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4
Q

What is control

A

actual results vs budget with appropriate action taken

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5
Q

What is communication

A

budget is a formal communication channel
Juniors to seniors can converse

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6
Q

What is co-ordination

A

all areas work towards a common corporate goal

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7
Q

What is evaluation

A

each manager has responsibility for its own areas
Budget can evaluate actions of a manager within the business in terms of cost & revenue they have control for

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8
Q

What is motivation

A

budget used as a target for managers to aim for
Reward for operating within/ under budgeted expenditure

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9
Q

What is authorisation

A

Formal method of authorising manager’s expenditure, hiring staff, pursuit of plans within the budget

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10
Q

What is delegation

A

Managers can be involved in setting the budget
extra responsibility can motivate managers
Can set more realistic targets

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11
Q

How do budgets link to performance management

A

benchmarks (variance analysis) & corrective measures

Detailed sales target, staffing plans, production, cash investment and borrowing, capital expenditure

Give managers pre-approval for spending- anticipate & avoid disastrous outcomes

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12
Q

What is strategic planning

A

LT
Whole organisation
Defines resource requirements
e.g develop new products for customers

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13
Q

What is tactical planning

A

Medium term
Department/ divisional level
Specifies how to use resources
e.g train staff on a product

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14
Q

What is operational planning

A

ST- detailed
where most budgeting activities are
e.g budget set to include advertising, sales forecast, labour & material
Impact of operational leads onto tactical and strategical success

Flexible to meet changing need of business

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15
Q

What do budgets in manufacturing usually include?

A

sales, production, materials usage, materials purchases & labour utilisation

capital expenditure, cash budgets all pulled together for a master budget

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16
Q

What are the 3 management styles used by Hopwood?

A

1) Budget constrained style
2) Profit conscious style
3) non- accounting style

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17
Q

What are the performance evaluation and behavioural aspects of budget constrained style (Hopwood)

A

Performance Evaluation:
Manager evaluated on ability to achieve budget in ST or criticised for poor results

Behavioural aspects:
Job related pressure
ST decision making at expense of LT goals - poor working relations with colleagues
manipulated of data

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18
Q

What are the performance evaluation and behavioural aspects of profit conscious style (Hopwood)

A

Performance Evaluation:
Manager evaluated on ability to reduce costs & increase profit in LT
Manager can exceed budget limit ST if it benefits LT

Behavioural aspects:
Less job related pressure
Better working relations with colleagues
Less data manipulation

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19
Q

What are the performance evaluation and behavioural aspects of Non-accounting style (Hopwood)

A

Performance evaluation:
Manager evaluated on non-accounting performance indicator e.g quality & customer satisfaction

Behavioural aspects:
Similar to profit conscious style bu less concern for accounting info
Requires stringent monitoring of performance against budget

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20
Q

What is an expectation

A

budget set at current achievable levels
Unlikely to motivate to improveMay give more accurate forecasts for resource planning, control & performance evaluation

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21
Q

What is an aspiration

A

Budget set at a level exceeding level currently achieved
motivate managers to improve if it’s seen as attainable
Can result in adverse variance if too difficult

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22
Q

What are the different approaches to budgeting

A

*Top down vs bottom up budgeting
* Incremental budgeting
* Zero-based budgeting (ZBB)
* Rolling budgets
* Activity-based budgeting
* Feed-forward control.

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23
Q

What is imposed style (top down) budgeting

A

budget allowance set without permitting the ultimate budget holder to participate in the budgeting process

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24
Q

What are the advantages of imposed style budgeting

A

1) Involving managers in setting budgets= time consuming
2) Managers may not have skill/ motivation to participate usefully in process
3) Senior managers= better verall view of the company & resources - better placed to create a budget using scarce resources
4) Seniors aware of LT strategic objectives- prepare in line
5) Budget holders can build budgetary slack/ bias into budget - make them easier to achieve and look better on them
6) imposed by seniors = more objective, fresher perspective
7) If participation isn’t genuine - budgets are drastically changed by seniors= dissatisfaction –> demotivate staff

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25
Q

What are participative budgets?

A

All budget budget holders are given the opportunity t participate in setting their own budgets

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26
Q

What are the advantages of participative budgets

A

1) Morale of management is improved- managers feel listened to & valued
2) managers are more likely to accept plans & achieve targets
3) lower level managers = more detailed knowledge of their particular part of business - more realistic
4) Frees up senior time

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27
Q

What are the motivational & co-operational behaviours?

A

These behaviours are needed for incentive - if not satisfied managers will be cautious & conservative
No incentive to achieve favourable variances
Need to be able to distinguish controllable from uncontrollable costs

Personal goals and usually linked to organisational goals - goal congruence
reliance on budgetary control systems doesn’t always result in goal congruence

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28
Q

How can there be a successful/ unsuccessful budget?

A

1) Budget is used as a pressure device - if viewed as a stick to beat people with= it will be sabotaged

2) budgeting process & control exercises induce competition between departments & execs. Managers may try to meet budget that aren’t in best interest of business as a whole

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29
Q

What is the purpose of budgetary control

A

induce managers to behave to the best advantage of the company
Compliance to budget enforced by negative & positive sanctions

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30
Q

What happens with adverse variances in budgetary control

A

implies poor performance by managers
If they can’t be correct or explain the adverse variances= negative sanctions
e.g no salary increase/ demoted

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31
Q

What could positive inducements be?

A

incentive to avoid adverse variances
performance-related salary bonus, promotion, new company car etc

Careful that it doesn’t skew performance

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32
Q

What is the view of budgets as a pot of cash

A

Some managers spend it through fear of reduced budget next year - can make their job more difficult or lose status in the organisation
Could mean that they use a stricter budget for the first 11 months to build a bugger (low quality/ cut backs) and splash out at the end - seen a lot in Gov departments

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33
Q

How do budget negotiations work

A

Budget can be initiated by departmental managers and corrected from a convo with the budget officer

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34
Q

What does padding the budget or budgetary slack mean?

A

incentive to negotiate a budget difficult to achieve
A manager exagerates the costs required to achieve objectives

1) if a manager does it = control exercise is damaged. Comparing actuals vs budget = meaningless so manager can include inefficiencies in operation if they want

2) successful managers= hard negotiators –> infighting in management

3) time & energy spent on admin procedures

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35
Q

What can influence accounting policies

A

apportioning costs and how they’re apportioned
this position creates scope & incentive for managers to argue over accounting policies
If managers perceive a department’s performance is below budget they may try to charge them elsewhere

36
Q

What is a conservative approached management style

A

immediate impact of a new business venture is likely to rise in capital & operating costs and adversely impact current period profit
Benefits felt LT
manager may perceive as below budget performance and turn it down

37
Q

How can budget constrained managers act

A

relying on reading financial reports
can lead to unsatisfactory corporate culture based on hierarchies & social divisions

Can favour projects that benefit budgets
choose project with little uncertainty are easy to incorporate
those with high uncertainties are attractive if there’s some high returns & low cost exit routes - difficult to incorporate into budgets

38
Q

what are the main findigs from budget studies e.g Hofstede and Stedry

A

1) loose budgets are poor motivators
2) as budgets are tightened up to a certain point they become motivational
3) beyond that point a very tight budget ceases to be motivational

39
Q

what are incremental budgets

A

starts with the previous period’s budget / actual results and adds/ subtracts an incremental amount to cover inflation

good for stable businesses - good cost control and limited discretionary costs

40
Q

Advantages of incremental
budgets

A

1) quick & easy method
2) good for a stable organisation & historic figures are acceptable - only increment needs adjusting
3) managers not demotivated by targets changing regularly

41
Q

Disadvantages of incremental
budgets

A

1) includes prev probs & inefficiencies
2) uneconomic activities coul be continued e. make inhouse when cheaper to outsource
3) managers may spend unnecessarily to use their budget so they get the same or larger next year

42
Q

what is zero based budgeting

A

each cost element is justified- without approval the budgeted allowance is zero

43
Q

what is zero based budgeting good for

A

1) Allocating resources in area where spend is discretionary i.e non essential e.g R&D, advertising & training

2) public sector orgs e.g local auth

44
Q

What are the 4 stages in implementation of zero based budgeting

A

1) Managers should specify for their area the activities that can be individually evaluated

2) Individual activities are described in a decision package which states cost & revenues from the activity

3) Evaluate each decision package & rank using cost/ benefit analysis

4) Resources are allocated to various packages

45
Q

Advantages of zero based budgeting

A

1) Inefficient/ obsolate operations identified & discontinued

2) increased staff involvement - more work & info required to complete budget

3) Responds to changed in business enviro

4) Knowledge & understanding of cost behaviour patterns = enhanced

5) Resources allocated efficiently & economically

46
Q

Disadvantages of zero based budgeting

A

1) emphasises ST benefits detrimental to LT goals

2) Budgeting process = too rigid & org may not be able to react to unforeseen opps / threats

3) management skills required may not be present

4) managers feel demotivated - a lot of time spent on process

5) ranking is difficult for different types of activities or where benefit are qualitative

47
Q

What is a decision package (Peter Pyhrr)?

A

doc that identifies & describes a specific activity so seniors can:
1) evaluate & rank against other activities competing for limited resources
2) decide whether to approve or disprove it

a) analyse cost of activity (costs can be built up from 0 base but costing info can be obtained from historical records or last years budget)
b) states activity purpose
c) identifies alternative methods of same purpose
d) assess consequence of no activity/ performing activity at different level
e) establishes measures of performance for activity

48
Q

What 2 types of packages of Pyhrr identify?

A

1) Mutually exclusive package: contain different methods of the same objective

2) Incremental package: divide the activity into different levels. Base package = min effort & cost for activity. Other packages = incremental & benefits when added to the package

49
Q

When can ZBB be used in the public sector

A

Use incremental budgeting every year. 3-5 years use ZBB for a major change

or use ZBB for only some departments for essential costs e.g heating & lighting

50
Q

What is a rolling budget?

A

kept continuously up to date by adding another accounting period when the earliest accounting period has expired (e.g month/ quarter)
Remaining budget is reforecast and add on the new period

51
Q

When are rolling budgets suitable

A

if accurate forecasts can’t be made (e.g fast moving environment) or if an area of business needs tight control

52
Q

What are advantage of rolling budgets

A

1) Planning & control based on more accurate budgets

2) Reduce uncertainty - concentrate on ST

3) always a budget that extends to the future (normally 12 months)

4) management reasses budget regularly & produce up to date budgets

53
Q

What are the disadvantages of rolling budgets

A

1) costly & time consuming > incremental budgets

2) can demotivate employees if they feel they spend a large proportion of time budgeting or targets constantly change

3) danger that budget is the same as last budget (+/- a bit)

4) increase in budgeting work = less control of actual results

5) issues with version control - each month FY number changes

6) confusion in meetings over whic numbers the business is working towards -detract from key issues

54
Q

What is activity based budgeting (ABB) ?

A

based on activity framework & utilising cost driver data in the budget setting & variance feedback processes

Preparing budgets using OH costs from activity based costing methodology

55
Q

What are the advantages of Activity based budgeting?

A

1) draws attention to ‘OH activities’ - large proportion of total operating costs

2) recognises that activities drive costs- control the drivers= better managed & understood

3) useful info in total quality management (TQM) environment- relates cost of activity to level of service provided

4) quite accurate

56
Q

What are the disadvantages of ABB?

A

1) time-consuming & admin heavy to establish key activities & their drivers

2) difficult to identify clear individual responsibilities for activities

3) in ST many OH costs aren’t controllable & don’t directly vary with volume of activity for cost driver. Only cost variances to report= fixed OH expenditure variances

4) If the area of work involves price of raw materials = fluctuates –> needs reworking

57
Q

What is an activity-based budget matrix

A

identifies activities in each column and the resources required to carry out activites in each row

58
Q

What are sustaining costs

A

e.g keeping records & supervision - not attributed to cost drivers - doesn’t reflect their true cost behaviour = inappropriate budgets being set

Treated as fixed costs

59
Q

What is feedback control

A

measurement of differences between planned outputs & actual outputs achieved - modification of subsequent action and/ or plans to achieve future required results

60
Q

Feedback control cycle

A

Compare budget vs activity
Explain variance
either/or revise budget or corrective action and repeat

61
Q

What is positive feedback

A

Feedback taken to reinforce a deviation from standard
Inputs/ processes not altered

62
Q

What is negative feedback?

A

feedback taken to reverse a deviation from standard
amending inputs/ processes to system reverts to a steady state
e.g machine reset over time back to its original setting

63
Q

What is single loop feedback

A

control to regulate the output of a system
Connecting a strategy for action to a result
e.g if result is different to what’s expected we observe results, take on feedback and try different approach to achieve targets
Don’t change targets

64
Q

What is double loop feedback?

A

When a business is able, having attempted to achieve a target various times, to modify the target/ budget in light of experience or possibly reject target

65
Q

What is a feedforward control system

A

compares budgeted results vs forecast and the differences trigger control action

If forecast is bad- control action is taken before actual results come through

66
Q

What factors determine how suitable a budgetary system is?

A

1) type & size of organisation
2) type of industry
3) type of product& product range
4) culture of organisation

67
Q

What sources of information can be used for budgeting

A

1) prev year actual results
2) internal sources e.g managers knowledge about state of repair of non-current assets , staff training needs, LT requirements of individual customers
3) estimates of cost of new products using methods e.g work study techniques & technical estimates
4) statistical techniques to help forecast sales
5) model e.g EOQ to forecast optimal inventory levels
6) external sources of info e.g suppliers price list, estimates of inflation, fx movements, strategic analysis of eco enviro

68
Q

What is the pestel model

A

Political change
economic change
social change
technological change
legal change
other factors

69
Q

What is political change

A

Change in Gov policy e.g fiscal policy can affect demand for an org’s products and/or cost in providing them
Change affect LT and ST planning - why planning is a continuous process

70
Q

What is social change?

A

changes in social responsibilities & people’s attitudes affect organisations
Some social changes now recognised by law and can affect plans

71
Q

What are economic changes

A

demands on people’s income can become more focused e.g from boom to recession
Money spent on necessity not luxury
Lack of saving deters investment - plans have to be modified if they’re to be realistic

can be local, national or international and include global factors e.g banking crisis & ongoing impact on world economies

72
Q

What are technological changes

A

plans made on certain equipment available
older methods become more inefficient
decisions are taken to update operations
so budgets are no longer relevant
Need to draw up revised plans

73
Q

What are legal changes

A

plans based on current legal framework
Known changes are factored in over time
Old info can become redundant

e.g Gov banning fast food ads between kids tv shows

74
Q

What are other factos

A

competitive factors e.g activities of rivals
Stakeholders factors e.g increased pressure from trade unions to initiate change

75
Q

Impacts of changes in a budgetary system

A

Time- consuming
improve planning, control & decision making

76
Q

What issues should be considered before changing a budgetary system?

A

1) Are staff suitably trained to implement it successfully

2) Changing the system take up management time- could be used for strategy?

3) All staff trained in the system & understand procedure to be followed in changing to new approach. Lack of participation & understanding builds resistance to change

4) Costs of the system change evaluated against benefits. Benefits can be difficult to quantify - rigourous investment appraisal may be difficult to prepare

77
Q

What factors can contribute to uncertainty in budgets?

A

Recession
changes to supplier prices

changes in external environment when a company has no control

78
Q

What changes in the external environment affect budgets?

A

1) Social/ political unrest affects productivity (e.g industrial action)/ natural disasters

2) Unexpected machine breakdown - fall behind production schedules

3) customer demand different to forecast E.g major customer goes into liquidation can have an impact on that business too

4) Workforce performing less than expected e.g demotivated/ illness or better than thought

5) Competitors strengthen/ emerge- take some business away or their position may weaken leading to increased business

6) tech advances = products/ services are out dated and less desirable

7) increase price of materials - global commodity prices changes

8) inflation and IR movement - price changes

79
Q

What techniques can be used to deal with uncertainty in budgets?

A

1) flexible budgets
2 ) rolling budgets
3) sensitivity analysis
4) simulation

80
Q

What are spreadsheets?

A

Computer packages that store data in a matrix with cells
Help with budgeting

81
Q

What are the advantages of spreadsheets?

A

1) can include large volumes of information
2) If a figure is amended all formulae update themselves - useful for sensitivity analysis
3) Results can be printed or distributed electronically/ quick & easy
4) Can represent results graphically

82
Q

What are the disadvantages of spreadsheets

A

1) time consuming to develop. Benefits must be greater than cost to develop & maintain
2) Data can be accidentally changed/ deleted without user being aware
3) errors in design = invalid output. Due to complexity errors may be difficult to locate
4) Data used subject to high degree of uncertainty.
5) security issues e.g risk of unauthorised access/ loss of data
6) Version control issues
7) Educate staff to use them= time consuming

83
Q

Characteristics of a modern economic environment (lean/ virtual businesses)

A

fast changing
flexible manufacturing
short product life cycle
products/ services highly customised

Own minimal traditional assets but can assemble resources to meet customer demand- flexible & quick to explot opportunities

84
Q

What is beyond budgeting

A

practices intending to replace management models. Core concept is moving from a business model based on centralised hierarchies to devolved networks

CIMA- the idea that companies need to move beyond budgeting because of the flaws. Take on rolling forecasts, market-related targets

85
Q

What are the 6 principles of beyond budgeting?

A

1) Structure has clear principles & boundaries - no doubts over responsibilities

2) Managers given goals & targets based on relative success- based on KPI

3) Managers given high degree of freedom for decisions- TQM & business process reengineering. BB= flat

4) Decision responsibility with front line teams - TQM and Business Process redesign (BPR) - aim of continuous improvement

5) Front line teams responsible for relationships with customers, businesses & suppliers - direct communication consistent with SCM concept

6) info support systems should be transparent & ethical

86
Q

Benefits of beyond budgeting

A

1) faster response time - flexible org allows managers to react quickly

2) Better innovation - where performance is based on team & business unit results- adopts new innovations e.g working methods/ apps

3) lower costs- resources used effectively rather than entitlement. Better awareness of purpose

4) Improved customer & supplier loyalty- increased front line teams = deepen relationships

ACCA Performance Management (15 decks)

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