Exam For Financial Management

Question 1

Question B - labour costs

Answer 1

Conventional accounting does not distinguish between flat rate wages paid to existing staff and the newly hired staff. Both would be costed to the project as direct costs. DR ignores wages that are going to be paid anyway and focuses on the extra cost of additional staff to complete the project (as shown in the extract here) as they are incremental cash outflows that will directly affect the decision

Question 2

Question B (depreciation of a fixed asset)

Answer 2

This would be ignored entirely for DR, whereas the scrap value involved by using that asset is a direct consequence. Unless activity based, this depreciation would be booked on a time basis for accounting purposes whether or not a particular project was undertaken

Question 3

What are the differences in public sector and private sector to do with budgeting

Answer 3

PSO’s have multiple objectives, whereas private sector companies objectives are more focused on

PSO’s are affected by political pressure

Many PSO’s have limited control over funding or expenditure

PSO’s can find it difficult to define the relationship between inputs and outputs-leading to stronger focus on budgets

Question 4

What is traditional/incremental budgeting and what are the advantages and disadvantages from Bourne (2004)

Answer 4

A method of preparation whereby last years budget is taken as the base
Advantages:
Easy to prepare and implement
Brings stability and function
Gives opportunity to consolidate projects into a larger one

Disadvantages Bourne (2004)
Constrains responsiveness and flexibility
Focus on detail loses strategic overview
Not perceived as value adding
Developed and updated too infrequently
Make people feel undervalued

Question 5

What are the advantages and disadvantages of rolling budgets

Answer 5

Advantages
Budgets are up to date and relevant to their current environment

Disadvantages
Time consuming and expensive
Might cause problems with performance incentives
Often requires a dedicated budgeting resource therefor more costly

Question 6

How does ZBB differ from traditional and what are some advantages and disadvantages

Answer 6

ZBB creates a budget for each new period. It can lower costs by keeping old and new expenses in check but it can reward short term thinking and be resource intensive.

Question 7

What is ABB budgeting and what are the disadvantages and the advantages

Answer 7

A system the records, researches and analyses activities that lead to costs for a company
Advs
As it’s based on cost drivers it more accurately reflects the cause of costs
Enables focus on overhead and support costs
Disadvantages
Costing system needed to match
Time consuming and costly
May require a cultural change

Question 8

What is bottom up budgeting, advs and disadvantages

Answer 8

All participants in the budget are given the oppertunity to set up their own budget
Advs
Increased motivation
Should contain better info
Increases managers understanding and commitment
Better communication
Disadvantages
Loss of control
Inexperienced managers
Budget not in line with objectives

Question 9

What did Hofstede (1968) say about budgeting

Answer 9

Budgets do not motivate unless they are accepted as personal targets

Up to a point of non-acceptance, the more demanding the better the results

Over demanding budgets produce negative results

Two way communication processes makes accepteance easier

Question 10

Why are budgets good according to CIMA (2004)

Answer 10

AIDS coordination and control, vital in bigger business and still key in smaller ones for mapping the road ahead for the business

Question 11

What do companies need to keep in mind when budgeting according to CIMA

Answer 11

Don’t try and and perfect budget controls as this could lead to an excessively inward focus

Companies need to value openness and flexibility

Question 12

What did Bunce (2004) say about budgeting

Answer 12

Too time consuming
Too expensive
‘Broken free from the shackles of budgeting”
Emphasis of trust leading to empowerment

Question 13

What did Lynne (2004) say about budgeting

Answer 13

Uncertain environments
Drives bureaucracy

Question 14

Question B - fixed costs

Answer 14

Fixed costs are always reflected in conventional accounting whereas DR ignores fixed costs that are committed and unavoidable, but includes them if they are incremental cash flows

Question 15

Question B - matched costs

Answer 15

The historic cost convention, where stock are valued at acquisition cost until matched with a sale. DR however, regards historic cost as a sunk cost, substitutes it for scrap value or alternative use value