Task 2: Evaluate budgetary reporting and effectiveness in controlling & improving organisational performance

Question 1

How to get budgetary assumptions (from facebook)

Answer 1

What are the assumptions on sales (revenue and growth)?

What are the assumptions on costs?

What are the assumptions on the business environment externally(eg are they taking into account inflation, external factors)?

What are the assumptions on the business internally (staff levels, materials levels, fixed costs - is anything happening that will affect these)?

Then once I’ve identified those - what have they based this on? Is it realistic?

Question 2

If analysing whether assumptions are realistic remember the relationships between all the main figs

Answer 2

If they don’t move proportionally think about *

1. CAPACITY > VOLUME
   * Timing (expand no. of restaurants but not all on Day1
   * Demand
2. VOLUME > COS
   (Compare COS to Volume not Revenue)
   * Cost behavior (some fixed eg waiting staff)
   * Economies of scale (vol discounts; other efficiencies)
3. REVENUE > VOLUME
   * Changed pricing (competition, less affluent locations)
   * Changed mix (eg. more lunches to dinners, less wine)
4. OPEX > VOLUME
   (opex costs more fixed than cos / shouldn’t rise as fast)
   * Stepped costs
   * Cost savings possible … anything in narrative?

Question 3

Ways to have avoided sales decline due to competition?

Answer 3

1. Better market intelligence

2. Proactive marketing

Question 4

PRESENTATION of Budget points
(Improvements)
Froom AAT practice 2 (about budgetng per product)

Answer 4

• Break down into short periods
  (Allow products to be monitored more closely)

(For products)
* Identify Volume, SP, Cost
(Would alow profitability of individual products to be easily identified)

• Split costs into controllable / non-controllable
  (Allow mgrs to focus)
• Flex budgets according to volume
  (Allow individual costs and rev to be compared more accurately)
• Show last years actuals
  (Provides a better picture of product perfomance)
• Provide a COMMENTARY
  (Allow greater insight into how budget figs have been calculated)
• Show variances between this years budget and last years actuals
  (Highlight to managers key areas of change/significant differences)
• Show contribution for each product
  (Allows fairer comparisons to be made as the fixed costs are not included)

Question 5

Need to be able to talk abut standard costing techniques and how they help (be able to relate to task)

when they are appropriate

nb in task re opening branch of service engineers I said it would help but answer was that there were not ‘routing production of identical items’ so it wouldn’t

Answer 5

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Question 6

Need to know each of the basic budget types eg Rolling flexed fixed topdown participative… to be able to identify the one being used in the task and also to be abe to talk about what would be better etc so need to know what situation they are good for advantages, disadvantages etc.etc

Be able to relate to Task and remember to do so in exam!

Answer 6

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Question 7

Need to be able to suggest performance measures. maybe try and get some sort of list to help … also just practice

Answer 7

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Question 8

ABC

Basic explanation.

Pros & cons

Example OH cost where ABC cannot give more accurate info than absorption costing (Facility costs: eg site security or maintenance… cannot be allocated on basis of activities.)

Answer 8

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Question 9

Start with the requirements so you know why you are reading the rest of the scenario and you know what to look for. You may generate lots of ideas and it’s important that you allocate your ideas to the correct requirement. A shotgun answer with ideas all over the place will not score well. Re-read the requirement after you have written your answer to make sure that you have really satisfied it. Make sure that you use the scenario and do not write generic answers which may not be relevant

Answer 9

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Question 10

Nick Craggs:

https://www.youtube.com/watch?v=TFK8eACPz9Y

Task 2 is about problems with the budget not about why the company didn’t meet the budget.. students write about why the biz hasn’t done well because of this and that which is NOT what the question is about

Answer 10

.Budgetary weaknesses question things like

Why is there an assumption fixed costs will go up with volume??

they’ve budgeted a selling price rise … great … but is it achievable?

Question 11

When asked if a budget is likely to be motivating .. what to think about?

Answer 11

• Top down / Bottom up ?
  Was there INPUT ? If not there might not be Ownership
• Stretching but achievable ?
  If not will not be effective at motivating.
• Any extra points like:
• experience in setting budgets.
• PRP (reward must be desirable & timely)

Question 12

ROLLING BUDGET

A budget (usually annual) kept continuously up to date by adding another accounting period (e.g. month or quarter) when the earliest accounting period has expired.

Suitable if:

accurate forecasts cannot be made. For example, in a fast moving environment.
or for any area of business that needs tight control.

Advantages:

1. Planning & Control will be based on more accurate budget
2. Reduce the element of uncertainty since focus n short-term
3. There is always a budget that extends into future.
4. Forces management to reassess budget regularly and to produce budgets that are more up to date.

Disadvantages

1. More costly and time consuming than incremental (may end up incremental)

2.

Answer 12

A budget (usually annual) kept continuously up to date by adding another accounting period (e.g. month or quarter) when the earliest accounting period has expired.

A typical rolling budget might be prepared as follows:

(1) A budget is prepared for the coming year (say January - December) broken down into suitable, say quarterly, control periods.
(2) At the end of the first control period (31 March) a comparison is made of that period’s results against the budget. The conclusions drawn from this analysis are used to update the budgets for the remaining control periods and to add a budget for a further three months, so that the company once again has budgets available for the coming year (this time April - March).
(3) The planning process is repeated at the end of each three-month control period.

Question 13

ABC BUDGETING

preparing budgets using overhead costs from activity based costing methodology.

Advantages:

1. It draws attention to the costs of ‘overhead activities’ which can be a large proportion of total operating costs
2. It recognises that it is activities which drive costs. If we can control the causes (drivers) of costs, then costs should be better managed and understood.
3. ABB can provide useful information in a total quality management (TQM) environment, by relating the cost of an activity to the level of service provided.

Disadvantages:

1. time and effort might be needed to establish the key activities and their cost drivers.
2. difficult to identify clear individual responsibilities for activities
3. many overhead costs are not controllable

Answer 13

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Question 14

INCREMENTAL BUDGETING

An incremental budget starts with the previous period’s budget or actual results and adds (or subtracts) an incremental amount to cover inflation and other known changes.

It is suitable for stable businesses, where costs are not expected to change significantly. There should be good cost control and limited discretionary costs.

Answer 14

Advantages

1. Quick & easy
2. Suitable if org is stable and historic figs are acceptable since only the incremental change needs justified

Disadvantages

1. Builds in previous inefficiencies
2. Uneconomic activities may be continued (ie. continue make in-house when wd be better to outsource)
3. Managers may spend so budgets don’t get reduced next year

Question 15

A method of budgeting that requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero’

It is suitable for:

• allocating resources in areas were spend is discretionary, i.e. non-essential. For example, research and development, advertising and training.
• public sector organisations such as local authorities.

Advantages:
1. Inefficient or obsolete operations get identified and discontinued

2. Increased staff involvement
3. Responds to changes in biz environment
4. Resources shd be allocated economically
5. Knowledge and understanding of cost behaviour/patterns of the org will be enhanced

Disadvantages:

1. Emphasises short term benefits to the detriment of long term goals
2. Management skills may not be there to do it.
3. Could be demotivating due to time spent on process
4. Ranking can be difficult especially where benefits are qualitative

Answer 15

There are four distinct stages in the implementation of ZBB:

(1) Managers should specify, for their responsibility centres, those activities that can be individually evaluated.
(2) Each of the individual activities is then described in a decision package. The decision package should state the costs and revenues expected from the given activity. It should be drawn up in such a way that the package can be evaluated and ranked against other packages.
(3) Each decision package is evaluated and ranked usually using cost/benefit analysis.
(4) The resources are then allocated to the various packages.

Question 16

Bottom Up budgeting (Participative)

A budget that is set without allowing the ultimate budget holder to have the opportunity to participate in the budgeting process.

5 advantages / 5 disadvantages

Answer 16

Advantages:

1. Increased motivation due to Ownership
2. Should contain better info since set by those familiar with the department
3. Increases managers understanding and committment
4. Better communication between departments
5. Senior managers time freed to concentrate on strategy

Disadvantages:

1. Senior managers resent loss of control
2. Dysfunctional behaviour : budget may not align with corporate objectives as mgrs lack strategic perspective and focus on divisional concerns
3. Bad decisions from inexperienced mgrs
4. Budget prep is slow
5. Mgrs may build in slack

Question 17

FI Task 2 debrief part b asking “Assess how well the budget would motivate managers to create sustainable & profitable growth” (3 marks).

Targets are motivating (add rider as long as achievable)
(sales and costs)

Say what it would motivate them to do ie. lower material costs in budget would motivate them to CONTROL costs

Look for a decision made ‘at the top’ to say something would be demotivating.

Seems like you want to make these 2 points:

1. Targets are motivating as long as attainable
2. Top down is demotivating
3. Wildcard eg. Investment in equipment etc tends to be motivating. Things that help employees make job easier

Answer 17

Basically she took 3 items and just wrote a bit about

1. Investment in new equipment would be motivating for the chefs … as long as adequate training was given. I get this
2. She said the 25% revenue increase would be motivating to managers to achieve the sales targets !!!… as long as it was achievable !!! whereas I thought the answer would be that it wasn’t motivational because unrealistic…. I suppose maybe the point is that TARGETS in general are motivating EXCEPT if unrealistic
3. Her third one was the lower material costs in the budget would motivate managers to CONTROL costs !!!..
4. Reduction in marketing budget would be demotivating because managers would perhaps see this as meaning have to do own marketing and make harder to achieve revenue target. Also demotivating because decision made at the top and beyond their control

Question 18

Given fixed budget & actuals (not flexed) ad vars.

Type of budget and how does it link to long term strategies?

Answer 18

Its fixed

Means it was part of the originally agreed budget for the year and will have been approved by senior management.

As such the budget represents the long term targets the org should be working to

These are based on the orgs long term strategy.

Budget does not help with cost control because its not flexed

Question 19

Flexed budget benefits

How can help organisational perfomance

Answer 19

(PRIME)

1. Helps senior management to monitor PERFORMANCE of departments/ managers.
   Knowing performance will be monitored should motivate mgs to improve.
2. Helps the middle mgrs CONTROL costs & revenues.
   ie Can see whether achieved plan and where differs and can take action to correct for next period.
3. Helps delegate responsibility/ accountability

Managers, knowing performance will be monitored should be motivated. (ie Targets are motivating …. as long as attainable)

Question 20

Standard costing system

Answer 20

A standard cost is established for each item produced. (including mat qty/price & lab hrs/rate)

Can be used to quickly used to create budgets,
Can be used in decision making eg. pricing

Actual costs are monitored and compared to standard to identify variances.

These variances can be analysed in more detail than variances from budget. Eg sub variances.
This helps allocate responsillbility eg. prod mgr / pur mgr .,. remember interdependence.

also remember standard (ie needs to be attainable)

Con is TIME CONSUMING TO SET UP

Question 21

Remember to think about whether the budget was ‘sound’ in the first place … ie could be reason for adverse vars

Answer 21

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