D Theory Flashcards
(203 cards)
1
Q
What can time series analysis be used for?
A
To analyse historic data and establish any underlying trend and seasonal variations within the data
2
Q
What is the trend in time series analysis?
A
Refers to the general direction the data is heading in and can be upward or downward
3
Q
What is meant by seasonal variation?
A
Refers to the regular variations which exist within the data. This could be a weekly variation with certain days traditionally experiencing higher or lower sales than other days, or it could be monthly or quarterly variations
4
Q
What is a moving average?
A
A series of averages, calculated from historic data
5
Q
What is meant by a negative variation?
A
The actual figure in that period is less than the trend
6
Q
What is meant by a positive variation?
A
The actual figure is more than the trend
7
Q
What does the size of the movements in the dependent variable depend on?
A
The size of the movements of the independent variable
8
Q
The axis of the independent variable?
A
Horizontal axis
9
Q
The axis of the dependent variable?
A
Vertical axis
10
Q
What is meant by the “line of best fit”
A
Predict what will happen at other levels of production
11
Q
Disadvantage of line of best fit?
A
Estimated from the data points plotted and different lines may be drawn from the same set of data points
12
Q
Why is regression analysis more reliable than the line of best fit?
A
Uses the historic data and finds a line of best fit, but does so statistically, making the resulting line more reliable
13
Q
When the stronger the relationship between the variables?
A
The more reliance can be placed on the equation calculated and the better the forecasts will be
14
Q
Why is a stronger correlation necessary for where a company wants to use past data to forecast the future>
A
The stronger the correlation, the better the estimates will be
15
Q
What is the correlation coefficient?
A
The strength of correlation between variables
16
Q
Assumption of regression analysis? (past)
A
What has happened in the past is a good indicator of what will happen in the future is a simplistic assumption
17
Q
What is a flexible budget?
A
A summary of revenues and costs across a range of different activity levels
18
Q
What is a fixed budget?
A
Allocates a set amount of money for specific expenses or categories over a defined period
19
Q
When does flexible budgeting happen?
A
At the beginning of a budgeting period—revenue, costs, and profit are forecast across a range of activity levels
20
Q
Flexible budgeting advantage? (accurate)
A
Managers will be able to plan and forecast more accurately as they are required to consider a range of forecasts
21
Q
Issue if businesses have a high level of indirect costs?
A
Making it difficult to separate fixed and variable costs from total indirect costs
22
Q
How are budgets usually prepared?
A
On an annual basis
23
Q
What is meant by a rolling budget?
A
Budget will be updated more frequently than annually – either quarterly or even monthly – and a new budget period will be added to replace the expired period
24
Q
Advantage of rolling budget?
A
More accurate as it is updated more frequently, improving planning and control. Useful for unpredictable events
25
Disadvantage of rolling budget? (training)
Rolling budgets require more work as managers will need training which is likely to be expensive and time-consuming
26
Disadvantage of rolling budget? (performance targets)
Conflict may emerge regarding performance targets – managers may complain of, 'changing goal posts'
27
Disadvantage of rolling budget? (software)
The company may need to acquire new software which allows for regular updating of the budget
28
What happens to indirect costs under an absorption costing system?
Indirect costs are pooled together and labelled ‘overheads.’ An overhead absorption rate is then calculated, based on a single driver
29
What does ABB want to understand? (overheads)
Understanding how overheads are consumed by the production process
30
What are non-value adding activities?
Activities which do not increase the customers’ perceived worth of the final product
31
Benefits of ABB? (profit)
The budgeted costs and profit per product should be more accurate as costs per driver are determined after detailed analysis
32
Benefits of ABB? (value)
ABB helps align value-added activities with objectives, reducing costs in the process.
33
Disadvantage of ABB? (overheads)
ABB will require detailed analysis of overheads and measuring of activities. This can be a complex, costly and time-consuming project
34
Disadvantage of ABB? (direct costs)
If direct costs are more significant than indirect costs, and if the product range is narrow, the costs might outweigh the benefits of switching to ABB
35
What is incremental budgeting?
A simple, straight-forward approach which uses either last year’s budget or actual results as the starting base for the next year’s budget
36
What is meant by slack in incremental budgeting?
Intentional overestimation of expenses or underestimation of revenues to create a buffer or cushion in the budget
37
Disadvantage of incremental budgeting (outdated)?
Last year’s budget might also include outdated assumptions which would be carried forward into the new budgeting period using incremental budgeting
38
Disadvantage of incremental budgeting (end of year)?
Managers may also be motivated to spend everything in their budget towards the end of the year to ensure they receive the same amount, or more, in the following year.
39
Why was zero-based budgeting developed?
In response to the issues surrounding incremental budgeting
40
What is zero-based budgeting?
An approach to budgeting where all expenses must be justified at the start of each new budgeting period
41
What are decision units in zero-based budgeting?
Managers of each decision unit then evaluate the activities and processes they need to achieve their objectives
42
What are decision packages in zero-based budgeting?
Detailing information on costs, resources required and different levels of output
43
What happens with decision packages after they've been generated?
They are ranked, and a budget is created by allocating funds to the most attractive decision packages
44
Advantage of zero-based budgeting (involvement)
Requires active involvement from managers and staff in preparing decision packages, their understanding of cost behaviours will be improved
45
Advantage of zero-based budgeting (allocation)
Result in better resource allocation and overall lower costs
46
Advantage of zero-based budgeting (obsolete)
Obsolete activities and processes will be cut out of the budget
47
Disadvantage of zero-based budgeting (time-consuming)
Data will need to be gathered for each decision package and some unknown information may need to be estimated
48
Disadvantage of zero-based budgeting (creatiion)
Requires extensive document creation and management time when evaluating decision packages
49
Disadvantage of zero-based budgeting (cycle)
The budgeting cycle is annual, so short-term goals may be prioritised instead of long-term goals.
50
Disadvantage of zero-based budgeting (criteria)
Conflicts might arise in setting criteria for the ranking of decision packages, and more budgeting skills are needed by managers
51
What does beyond budgeting encompass?
A modern, alternative approach to performance management that looks past the traditional, annual budget as the primary control tool of a company
52
Problems with regular budgeting (external factors)
Changing market conditions and competitors’ actions, can render fixed, annual financial targets out-of-date and useless for fair performance evaluation
53
Problems with regular budgeting (reward managers)
Modern organisations often depend upon teamwork, but traditional budgeting often rewards the manager to whom the team reports to
54
Problems with regular budgeting (past performance)
This means they only measure past performance and they don’t help the user of the report identify the root cause of any issues flagged
55
Advantages of beyound budgeting (faster response)
This is achieved by giving managers more authority to act immediately within clear strategic boundaries and allowing them to more quickly meet customer needs. Bureaucracy is highly discouraged
56
Advantages of beyound budgeting (innovative strategies)
Rewards go to teams and are based on relative performance versus peers, rather than individual incentives based on fixed targets
57
Advantages of beyound budgeting (rules)
An open and self-managed environment is promoted, rather than a culture of sticking to a set of rules
58
Advantages of beyound budgeting (loyal customers)
Put customer value at the core of their strategy and then adapt their processes to satisfy and delight them
59
Advantages of beyound budgeting (enlistment)
Managers no longer see the budget as an entitlement to spend, but rather as a scarce resource that should only be used when it adds value to the customer
60
Why is budgeting difficult in the public sector?
Since the objectives of the organisation are more difficult to define in a quantifiable way than the objectives of a private company
61
A common objective for a hospital?
Objectives may be largely qualitative, such as ensuring that all outpatients are given an appointment within eight weeks of being referred to the hospital
62
What is incremental budgeting?
The traditional budgeting method whereby the budget is prepared by taking the current period's budget or actual performance as a base, with incremental amounts then being added for the new budget period
63
What can be incremental amounts in incremental budgeting?
Include adjustments for things such as inflation, or planned increases in sales prices and costs
64
Benefits of incremental budgeting (prepare)
Since it is easy to prepare, it is also easily allocated to more junior members of staff
65
Benefits of incremental budgeting (understand)
As well as being easy to prepare, it is easy to understand
66
Benefits of incremental budgeting (costs)
Less preparation time leads to lower preparation costs
67
Benefits of incremental budgeting (departmental)
Prevents conflict between departmental managers since a consistent approach is adopted throughout the organisation.
68
Benefits of incremental budgeting (change)
The impact of change can be seen quickly. For example, the increase of $138k in staff costs for the aforesaid school can quickly be traced back to the employment of two new staff members
69
Drawbacks of incremental budgeting (activities)
It assumes that all current activities and costs are still needed, without examining them in detail
70
Drawbacks of incremental budgeting (existing costs)
With incremental budgeting, the head teacher does not have to justify the existing costs at all. If he can simply prove that there is an increase in the number of language lessons equivalent to two new staff's teaching hours, he can justify the cost of two new teachers.
71
Drawbacks of incremental budgeting (incentive)
There is no incentive for departmental managers to try and reduce costs
72
Drawbacks of incremental budgeting (performance)
Performance targets are often unchallenging, since they are largely based on past performance with some kind of token increase
73
What does zero-based budgeting start from?
A base of zero, with no reference being made to the prior period's budget or actual performance
74
What does zero-based budgeting try to achieve?
An optimal allocation of resources to the parts of the business where they are most needed. It does this by forcing managers to justify every activity in their department as they know that, until they do this, the budget for their department is zero
75
What if management can't allocate a resource in zero-based budgeting?
Work therefore stops
76
1st step in zero-based budgeting?
Activities are identified by managers
77
2nd step in zero-based budgeting?
Management will then rank all the packages in the order of decreasing benefits to the organisation
78
3rd step in zero-based budgeting?
The resources are then allocated based on order of priority up to the spending level
79
Benefits of ZBB (re-evaluated)
All of the activities of the organisation are re-evaluated annually from a zero base. Inefficient and obsolete activities are removed
80
Benefits of ZBB (bottom-up)
It encourages a bottom-up approach to budgeting in order for ZBB to be used in practice. This should encourage motivation of employees
81
Benefits of ZBB (status)
It challenges the status quo and encourages a questioning attitude among managers
82
Benefits of ZBB (environment)
It responds to changes in the business environment from one year to the next
83
Drawbacks of ZBB (departmental)
Departmental managers may not have the necessary skills to construct decision packages.
84
Drawbacks of ZBB (activities)
The number of activities will be so large that the amount of paperwork generated from ZBB will be unmanageable
85
Drawbacks of ZBB (quantitative)
Ranking the packages can be difficult, especially when there's 1000 of them. Since many activities cannot be compared on the basis of purely quantitative measures
86
A solution for using ZBB and incremental budgeting together?
This problem is to use incremental budgeting every year and then use ZBB every three to five years
87
Drawbacks of ZBB (budget time)
Since decisions are made at budget time, managers may feel unable to react to changes that occur during the year
88
Drawbacks of ZBB (information systems)
The organisation's management information systems might be unable to provide the necessary information.
89
Why is ZBB more suitable for public sector than private sector?
Its far easier to put activities into decision packages in organisations which undertake set definable activities
90
Why should never underestimate the extent of a perceived improvement?
As it can lead to a real deterioration in another area. Always mention interdependencies in exam questions
91
What is rolling budgeting?
As each month goes by, the budgets for the months ahead are reviewed and, if necessary, revised so that they remain relevant for the remainder of the budget period
92
Do flexible budgets distinguish between variable and fixed costs?
Yes
93
What is a fixed budget?
An annual budget set before the start of a year based on estimated sales and production volumes
94
What is feedforward control?
The manager is using a forecast to assist in making a future decision
95
What costs does ZBB focus on?
Costs relating to activities that the organisation wishes to continue to perform
96
What is an advantage of non-participative budgeting?
It should be less time consuming, as less collaboration will be required in order to produce the budgets
97
Linear regression analysis assumptions (linear)
Cost behaviour is linear
98
Linear regression analysis assumptions (estimates)
Provides more accurate estimates than the high-low technique
99
Assumtpion of simple linear regression (dependent variable)
The dependent variable is only affected by one independent variable; it cannot deal with multiple independent variables
100
Assumtpion of simple linear regression (past)
What happened in the past (as reflected in historical data) will continue in the future
101
When is simple linear regression suitable?
When there is correlation between two variables
102
What is interpolation?
Forecasting within the range of the original data
103
What is extrapolation?
Forecasting outside the range of the original data
104
Is interpolation or extrapolation more reliable?
Interpolation
105
What is management by exception?
Focusing management reports on areas which require attention and ignoring those which appear to be performing within acceptable limits
106
How is the flexed budget prepared?
At the same level of activity as actual output
107
What is budgetary slack?
The intentional over estimation of costs and/or under estimation of revenue in a budget
108
What is a cyclical variation?
Medium-term changes in values resulting from factors that repeat in cycles. Cyclical variations are longer-term than seasonal variations
109
What is the moving averages method?
Removes seasonal variations from data by averaging, taking the average of the results of a fixed number of periods
110
What does the additive model assume?
Components of the time series are independent, meaning the trend will not affect the seasonal variations
111
What is the multiplicative model based on?
Proportions rather than absolute values
112
When is the multiplicative model better for forecasting than additive model?
If there is an increasing or decreasing trend over time. This is because the seasonal variations will likely increase or decrease in line with the trend
113
Benefits of time series analysis (future)
It enables future predictions based on past experience.
114
Benefits of time series analysis (forecasting)
Analysing data into parts facilitates more accurate forecasting
115
Disadvantages of time series analysis (extrapolation)
Extrapolation becomes less reliable the further into the future the forecast is made due to changes in seasonal variations
116
Disadvantages of time series analysis (reliability)
The reliability of a forecast depends on the amount of data on which the trend and seasonal variations are based. The less data that is available, the less reliable the forecast will be
117
What is positive correlation?
When an increase in one variable is associated with an increase in the other
118
What is negative correlation?
When an increase in one variable is associated with a decrease in the other
119
What is perfect correlation?
When a change in one variable is matched by a change of equal degree in the other variable
120
What is zero correlation?
When there is no relationship between the variables
121
When a correlation coefficient is greater than one?
Denotes perfect positive correlation
122
When a correlation coefficient is less than one?
Denotes perfect negative correlation
123
When a correlation coefficient is 0?
The variables are uncorrelated (i.e. no linear relationship)
124
What does the coefficient of determination measure?
How much of the total change in the amount of one variable can be explained by the change in the other variable
125
Benefit of correlation and regression analysis (existence)
Correlation analysis can indicate the existence of associations between variables
126
Benefit of correlation and regression analysis (regression)
Correlation can be used with regression analysis to indicate the strength of the relationship indicated by the equation
127
Disadvantage of correlation and regression analysis (misinterpreted)
Correlation is easily misinterpreted as high correlation does not necessarily indicate a linear relationship, and there may be no direct connection between highly correlated variables.
128
Disadvantage of correlation and regression analysis (limited)
A limited amount of data may reduce the reliability of forecasts made
129
What is meant by coordination in a budgetary control system?
Coordinate the different activities of an organisation. This should help achieve goal congruence
130
What is meant by responsibility in a budgetary control system?
A budget is a way of delegating responsibility by showing managers which revenues and costs they are responsible for.
131
What is meant by utilisation in a budgetary control system?
Decisions such as ordering inventory and hiring staff will be guided by the budget, meaning that organisations do not acquire resources in excess of their needs
132
What is meant by motivation in a budgetary control system?
Research shows that giving managers a target in the form of a budget may improve their performance compared with giving them no target
133
What is meant by planning in a budgetary control system?
Budgets cover a short-term time frame, typically one year. Most organisations have a long-term plan as well
134
What is meant by evaluation in a budgetary control system?
Managers' performance is likely to be evaluated, at least partly, by how they perform against the budget they are given
135
What is meant by telling in a budgetary control system?
Superiors communicate their expectations of the managers below them
136
Primary focus of sustainability and ethical budgeting?
Have clearer information and goals on how budgeting decisions affect sustainability and societal well-being measures. UN SDGs are used
137
Components of a mission statement?
Reasons why the entity exists, type of business, values and culture
138
What is the master budget?
The master budget consolidates all other budgets. It is generally presented as a statement of profit or loss, a statement of financial position and a cash flow statement
139
Issue with master budget (subsidiary)
A problem with any of the subsidiary budgets may have significant effects on the master budget
140
What are primary functional budgets?
Sales, production, materials, labour and capital. The primary budgets may be consolidations from individual cost/profit/investment centres
141
What is a profit centre?
A business segment where revenues are received and expenditures incurred
142
What is an investment centre?
A profit centre which also has some control over its capital expenditure
143
How is a functional budget prepared?
Starting with identifying the principal budgeting factor (the main limiting factor), which is often sales demand. The sales, finished goods and production budgets may then be prepared
144
Disadvantage of functional budgeting?
A change in one budget (e.g. sales price and quantity) may require adjusting all the other budgets, which may be time-consuming
145
What is top-down budgeting?
Budgets are prepared by senior management
146
What is bottom up (participative) budgeting?
Managers participate in preparing their department's budget
147
Top-down budgeting advantage (centrally)
Since budgets are prepared centrally, the activities of the various departments should be better coordinated.
148
Top-down budgeting advantage (not prepare)
It may be difficult for managers with little financial or accounting knowledge to prepare budgets for their own departments. Top-down budgeting means that these managers would not have to prepare their own budgets.
149
Bottom-up budgeting advantage (motivation)
Managers may feel more motivated if they are given greater autonomy and more responsibility for their departments
150
Bottom-up budgeting advantage (unrealistic)
When managers' performance is being assessed, the managers cannot claim that the budget was unrealistic if they prepare the budget
151
Top-down budgeting advantage (senior management)
Senior management have greater control of the budgetary process. The budgets will, therefore, reflect more accurately the corporate objectives and the long-term plan.
152
Bottom-up budgeting advantage (understanding)
Managers will better understand the financial objectives of the organisation if they are involved in budgeting
153
When determining participation (managers)
The attitudes of junior managers to their work. Some may be very proactive and want to participate in managing their department
154
When determining participation (financial)
If their financial skills are weak, their participation may be limited
155
When determining participation (financial difficulty)
In periods of financial difficulty, when control of the resources and cash flows of the organisation is essential for survival, senior management should intervene
156
When are rolling budgets more appropriate?
In industries which are dynamic, where external changes can lead to the original budget quickly becoming out of date
157
When is ZBB most appropriate?
Organisations that have a high portion of discretionary costs (e.g. research and development, training and advertising). Expenditure on such items may be reduced without the organisation ceasing to function
158
When is ABB appropriate?
Organisation has high overheads, many different drivers to which the overheads relate
159
Aim of ABB?
Ensure the amount of resources available accurately reflects the activities required by an organisation's expected production and sales volumes
160
What does ABB want to resolve (utilised)
The resources which are under-utilised
161
What does ABB want to resolve (resources)
The areas where the level of resources available is insufficient to meet production and sales requirements
162
What is a feedback control system?
A system in which outputs are monitored against a predetermined standard. Action is taken to remedy any deviations
163
What is a budgetary control system an example of?
A feedback control system. For each period, the actual results are compared against the budget
164
Difference between a closed-loop and an open-loop system?
Closed loop allows for variance analysis by comparing the information from the sensor to the standar
165
What does positive feedback mean?
Output has achieved or even exceeded the plan
166
What does negative feedback mean?
The output is below the plan (e.g. actual profits are below budget for a particular period)
167
The main issue with feedback control systems?
By the time the feedback is received, it is too late to take action to correct the deviation for the period under review
168
How do feed-forward control systems work?
By predicting future results are compared against the desired outcome
169
What is meant by accurate in sources of information?
Fair, free from bias, truthful, with sufficient focus and precision.
170
What is meant by complete in sources of information?
It contains all the necessary information, with no material details missing.
171
What is meant by cost-effective in sources of information?
The benefit of information is higher than the cost of producing it
172
What is meant by user-focused in sources of information?
Tailored to information users" needs
173
What is meant by relevant in sources of information?
Information is useable for actions (control, decision-making)
174
What is meant by authoritative in sources of information?
Trustworthiness of information
175
What is meant by timeliness in sources of information?
It is clear when the information was produced
176
What is meant by easy to use in sources of information?
Easy to understand and prioritise
177
Examples of internal sources of information?
Accounting records
Employee records
Production department data
178
Examples of external sources of information?
Collect taxes on behalf of the government (VAT returns)
Businesses need to be aware of laws that affect their activities (Environmental legislation)
179
Disadvantages of changing the approach to budgeting (change)
Resistance to change – employees who do not appreciate the value of change
180
Disadvantages of changing the approach to budgeting (training)
Training everyone involved in the process of change
181
What are factors of uncertainty?
Actions of competitors
Performance of employees
Market prices of inputs
182
What is flexible budgeting?
Involves preparing two or more budgets, using different assumptions for each about the level of sales or production
183
Disadvantage of flexible budgeting (elements)
Difficulty in separating fixed and variable elements of indirect costs (overheads)
184
What does budget-constrained style in Hopwood Management mean?
Managers are evaluated on their ability to meet budgets in the short term
185
What does profit-constrained style in Hopwood Management mean?
Managers are judged more on their ability to contribute to long-term success rather than simply meeting the budget
186
Issue if targets are too easy to achieve?
Individuals will not be motivated to improve performance
187
What does research suggest?
Targets which are just out of reach are optimal for motivation
188
Issue with traditional budgeting (time)
Budgeting process takes up too much of the time of senior management, and does not add sufficient value to the organisation to justify this
189
Issue with traditional budgeting (modernity)
The primary drivers of shareholder value in the modern business world are intellectual capital such as brands, loyal customers and proven management teams. These are outside of the orbit of the budgetary control system.
190
Examples of garning in budgets?
Never take risks, never share knowledge or resources with other teams, always meet the numbers, never beat them
191
Beyond budgeting characteristics (financial)
Replace financial targets with targets based on key performance indicators (KPIs)
192
Beyond budgeting characteristics (resources)
Manage resources to be available for worthwhile opportunities
193
What does beyond budgeting request from managers for setting targets?
Beyond budgeting encourages managers to set challenging targets or "stretch goals" that cannot be achieved by making small improvements to existing performance
194
Beyond budgeting and rewarding people?
Uses relative targets (e.g. how managers perform compared to peers) or benchmarks
195
Beyond budgeting and action planning?
Business unit managers and front-line staff develop their own plans for maximising customer satisfaction and shareholder wealth
196
Beyond budgeting and managing resources
Resource decisions are devolved to front-line teams, making them more responsive
197
Beyond budgeting and coordinating actions
Coordination occurs through cross-company interaction
198
Beyond budgeting and controlling performance
Greater use of comparison of KPIs achieved against benchmarks and the use of league tables
199
Advantage of beyond budgeting (customer-focused)
More customer-focused attitude of departments that supply other internal departments.
200
Advantage of beyond budgeting (divisional managers)
Divisional managers will be more motivated as they will be given autonomy to plan for their own business units
201
Disadvantage of beyond budgeting (organisational culture)
The organisational culture may not support this approach (e.g. where senior managers are accustomed to a command-and-control style of management).
202
Disadvantage of beyond budgeting (appropriate)
May not be appropriate in organisations in which financial control is crucial to success
203
Advantage of beyond budgeting (performance)
Performance is not only focused on financial numbers but on KPIs that reflect the organisation's overall objectives
