Week 2 Flashcards
(12 cards)
1
Q
What are the two types of Control Systems?
A
- Feedback: measure differences between planned and actual results then modify actions to achieve actual results e.g variance analysis and quality control checks
- Feedforward: compare actual results with a forecast of future results e.g CF forecasting and year-end cost prediction
2
Q
What are the advantages and disadvantages of feedback control?
A
- Advantages:
Simple and easy to carry out
Can be automated using IT packages
Corrective action is identified - Disadvantages:
Involves taking action after the event => can be too late to stop things from going wrong or correcting problems
Information provided may be delayed or output may be inaccurate
Planned results may be unrealistic => behavioural problems
Noise => anything preventing communication of feedback to controller e.g lack of clarity in feedback
3
Q
What are the advantages and disadvantages of feedforward control?
A
- Advantages:
Tries to correct a problem before it materialises/becomes significant
Can be built into many accounting packages, and supported by spreadsheets
Reposition business strategically => gain cost advantages e.g. costs rising, may decide to look into alternative production techniques => significant overall cost savings - Disadvantages:
Forecasts must be produced regularly so an efficient forecasting system is needed
Time-consuming and costly
High uncertainty, forecasts inaccurate
4
Q
What are the three types of control?
A
- Action Control:
Behavioural Constraints - prevent ppl from doing things e.g computer passwords
Preaction Reviews - approval of action before carrying it out
Action Accountability - actions are rewarded or punished for - Personal, Cultural, Social Controls:
Personnel Controls - employees have resources to do job e.g training
Cultural Controls - values and norms
Social Controls - Results/Output Controls:
Select Performance Measures - KPI
Performance Targets - SMART (Specific, Measurable, Achievable, Relevant and Timebound)
Measure Performance
Provide rewards or punishments
5
Q
What is Responsibility Accounting?
A
- Distinguish between controllable and uncontrollable items (Controllability Principle)
- Determine how much influence managers should have in setting targets
- Determine how challenging they should be
6
Q
What is the Controllability Principle?
A
- Responsibility accounting tries to ensure managers only held responsible for activities that are under their control, or can be significantly influenced by that manager
- Controllable costs => costs directly influenced by a given manager
- HOWEVER, difficult to implement principle because:
Some costs might be partially controllable e.g external forces/market fluctuations may impact energy prices => managers can try manage amount of energy consumed => managers cannot be held responsible for total energy costs as price = uncontrollable
Restructuring/investments decided at higher level can impact managers profitability in division
Shared services e.g IT, legal etc. these costs are allocated to departments but if there’s an update in IT software this will impact costs in department even though this software may not directly be used for the department
Economic and regulatory changes
7
Q
What are the different areas of Responsibility Accounting - What are the Budgeting Centres responsible for?
A
- Cost centre - costs only
- Revenue centre - revenue only
- Profit centre - costs and revenue
- Investment centre - costs, revenue and capital investments
- Strategic business unit (division in a business focusing on a single product, market or geographical area) - all of the above + ‘local’ strategy
8
Q
What are the different Budgeting Techniques?
A
- Incremental Budgeting
- Traditional Budgeting (Top-Down and Bottoms-Up)
- Better Budgeting:
Zero based budgeting (ZBB)
Activity based budgeting (ABB)
Value-based Mgt (VBM)
Profit planning
9
Q
What are the advantages and disadvantages of incremental budgeting?
A
- Previous year’s budget taken as start point for next year’s budget
- Advantages:
Gives starting point to plan and allows MD to start thinking of LT strat
Provides targets that can be used when deciding on performance-related bonuses - Disadvantages:
Short-termism
Time Consuming => could be out of date
Inflexible to change
Focus on cost reduction
Promotes game playing e.g spend all of budget to avoid reduced budget next year, lack incentive to be efficient, budgetary slack - overstate costs or understate revenue to achieve target easier
10
Q
What are the advantages and disadvantages of Top-Down and Bottoms-Up Budgeting?
A
- Top-Down Budgeting: High level budget prepared by senior managers
- Bottoms-Up Budgeting: Managers have input on budget which is then reviewed by senior managers
- Advantages (TD):
Strategic alignment between individual budgets and targets of business
Quicker and avoids budgetary slack/game playing - Disadvantages (TD):
Lack of ownership of budget => demotivated employees especially if budget targets are ambitious
Poor relationship between senior management and budget holders - BD has opposite advantages and disadvantages
11
Q
What are the advantages and disadvantages of Zero-Based Budgeting (ZBB)?
A
- Budget set to zero, use decision packages of activites/resources to achieve objectives. These are then ranked and funds are allocated accordingly
- Advantages:
Accountability => justify every expense => improved understanding of costs => encourage thoughtful decision making
Eliminate budgetary slack
More flexible and responsive to market changes - Disadvantages:
Time consuming and costly
Relevant info can be difficult to obtain
Revenue and cost items can be easily missed
12
Q
What are the advantages and disadvantages of Activity-Based Budgeting (ABB)?
A
- Advantages:
Link cost incurred to the level of activity taking place
Encourage managers to question and potentially reduce activity levels where possible => reducing cost - Disadvantages:
Time consuming and costly
Relevant information can be difficult to obtain
Cost drivers difficult to identify when growth rates are high
