Chapter 9: Budgetary Control Flashcards
What is budgetary control?
assessing actual performance against budgeted performance and taking corrective action when necessary
What are controllable costs?
Costs which can be influenced by the budget holder and are generally considered to be those which are
Variable OR
Directly attributable fixed costs
What are uncontrollable costs?
Costs that cannot be influenced by management action
What is the aim of feedback control?
Correct problems that have been discovered at the period when the actual results are compared with the budget.
Happens after the event and discovers that something has gone wrong
What is the aim of feedforward control?
Anticipate problems with the aim of preventing them from occurring.
Comparison of the results that are currently expected in the light of the latest information and the desired results.
What is a fixed budget?
Contains information on costs and revenues for one level of activity
What is a flexible budget?
Shows the same information, but for a number of different levels of activity.
What is the two key benefits of a flexible budget?
Managers are better prepared for a range of scenarios
Variances can be based on the most suitable budget
What is top down (imposive) when preparing budgets?
Senior management prepares budget.
Senior management > Middle-line managers > Operational managers
What are the benefits of a top down budget?
Quicker
Better for goal congruence
Better co-ordination
Avoid budgetary slack
Managers may not have the skills or motivation to be involved
What is bottom up (participative) when preparing budgets?
Operational management prepares budget.
Operational managers > Middle-line managers > Senior management
What are the benefits of a bottom up budget?
Better decisions
Motivates
Budgets are more acceptable
What are some reasons for a budget to have an influence on performance?
Recipient must be aware of existence and be committed to achieving it
Must be set at the right level of difficulty to act as a motivator
Too easy - performance will not be optimised
Too difficult - managers may become discouraged and demotivated
‘Tough but attainable’ = optimal level of performance
What are some reasons why budgets may cause unethical behaviour?
Conflicting objectives for budget holder and setter
Undue pressure on the budget holder
Unethical practices to achieve targets
False representation of results
What are the possible implication of unethical behaviour with budgets?
Failure to achieve organisational goals
Damage to reputation
False information for investors
Loss of staff/demotivation
