Lecture 7

Question 1

Budget definition

Answer 1

The quantitiative expression of a companys action plan

E.g. planned production levels and targets, planned resource use

A tool for planning, coordinating, controlling, motivating and communicating

Summarized in a set of budgeted financial statements

Typically for a period of one year

Question 2

Functions of budgeting

Answer 2

Planning and coordination

Motivation and performance measurement

Communication of goals and strategy

Question 3

Planning and coordinating

Answer 3

Quantify and operationalize strategic goals

Ensures resource availability

Overcome past issues and incorporate future changes

Coordinate: balancing of all factors of all the departments to meet strategic objectives

Question 4

Motivation and performance measurement

Answer 4

Clear indicators and milestones

Compensation can depend on budget achievements

Question 5

Communication of goals and strategy

Answer 5

Communicate: getting objective understood and accepted by employees

Close the gap between “status quo” and vision

Question 6

Planning and coordination (modern company)

Answer 6

Quantify and operationalize

Overcome past misallocation and sub-standard performance

Incorporate future changes

Question 7

Communication (modern company)

Answer 7

Bridge the gap between “status QUo” (small-scale production c ulture) and new vision

Prommote coordination and communication to align goals

Question 8

Motivation (modern company)

Answer 8

Measure and evaluate performance on the dimensions that metter to the new strategy

Question 9

Master budget

Answer 9

A comprehensive set of budgets that includes operating and financial planning

Question 10

Operating planning

Answer 10

How to use (scarce) resources

Question 11

Financial planning

Answer 11

How to get funds to acquire resource

Question 12

Capital budget

Answer 12

Which long term projects to finance

Identify investments

Choose investment

Question 13

Liquidity planning

Answer 13

Available cash = beginning cash balance less minimal cash balance

Question 14

Criticisms of budgeting practices

Answer 14

Time consuming (managers, management accountants)

Impedes adaptability
(how to deal with unforseen opportunities or challenges)
(should budgets be revised during the budget period)
(period effects and rolling forecasts)

Leads to fixed performance contracts
(should targets be (subjectively) adjusted ex post/at the end of the period)

Disconnected from firm strategy

Question 15

Computer based models

Answer 15

Financial planning models: what if analysis
E.g. what if selling price dops to
What if material costs increase to

Models interrelationships among depts

Question 16

Kaizen budgeting

Answer 16

Incorporates continuous improvement into the budget numbers during the budget period

Question 17

Activity-based budgeting (ABB)

Answer 17

Focuses on the budgeted cost of activities

Forecat production volume -> activities -> costs

Question 18

Budgeting and participation
Top-down approach

Answer 18

Central determination of budgets based on data from strategic planning

Only fine-tuning on lower, decentralized levels

Question 19

Budgeting and participation
Mixed approach

Answer 19

Interaction and iterations between headquarter and decentral units

Question 20

Budgeting and participation
Bottoms up approach

Answer 20

Composing of budgets on lower, decentralized levels

Compiling on central headquarter level

Question 21

In the mixed and bottom-up approach:

Answer 21

Active participation of lower-level managers

Participative budgeting can be costly due to negative consequences of manager involvement

Poor planning and coordination

Higher management compensation (due to slack)

Question 22

Information asymmetry

Answer 22

One side with more/better/superior information and the opportunity to exploit this information advantage

Question 23

After contracting asymmetry

Answer 23

Hidden action

Moral hazard

Question 24

Before contracting information asymmetry

Answer 24

E.g. hidden characteristics:
Adverse selection

Question 25

Information asymmetry: so now what

Answer 25

Management accounting is often about understanding these problems and designing a control system to minimize negative effects of information asymmetry

E.g. in the design of

A costing system

A performance measurement system

Budget reporting system

Question 26

Information asymmetry: countermeasures (signaling)

Answer 26

Costly signals attractive for good participants and unattractive for bad ones

E.g. certificates or diplomas

Question 27

Information asymmetry: countermeasures (screening)

Answer 27

Learn more about the relevant characteristics

E.g. Health checks

Pay experts to check used cars

Question 28

Information asymmetry: countermeasures (monitoring)

Answer 28

Make the agents actions “observable”

E.g. Surveillance

Spot checks

Question 29

Information asymmetry: countermeasures (contracts)

Answer 29

Design contracts/incentives to align interests

E.g. performance-driven compensation

Clawbacks (i.e. ask to pay back bonus)

Question 30

Relevant field of management accounting research

Answer 30

Managers not often completely honest, but rarely lie to the extreme

Managers trade off financial gains with self-image of being moral

Managers distort reports to implement CSR projects

Managers are rather willing to lie when another person profits