ACCA Paper P5 (INT) Advanced Performance management - Pocket notes - Kaplan - 2010
Подождите немного. Документ загружается.
41
Approaches to budgets
In this chapter
Approaches to budgeting.•
Beyond budgeting.•
Behavioural aspects of budgeting.•
chapter
3
Approaches to budgets
42 kaplanpublishing
Approaches to budgets Chapter 3
This section of the paper draws on technical
knowledge from previous papers on different
approaches to budgeting, but the emphasis
of P5 is on the practical issues relating to the
choice of an appropriate method, the impact
of budgeting approach on behaviour and
whether organisations should move ‘beyond
budgeting’.
Questions may be asked on particular
approaches to budgeting such as zero- or
activity-based budgets.
Exam focus
Approaches to budgets
Approaches to budgets Chapter 3
kaplanpublishing 43
Approaches to budgeting
Fixed - when a budget is prepared for a
single level of activity
Flexed - changed to actual level of activity
for control purposes
Rolling - Kept continually up to date by
adding another period when the earliest
period has expired
Incremental - starts with previous period’s
budget or actual results and adds or
subtracts an incremental amount.
Definition
Activity-based budgeting
Activity-based budgeting is ‘a method of
budgeting based on an activity framework
and utilising cost driver data in the budget-
setting and variance-feedback processes’.
Steps involved
1 Identify cost pools and drivers.
2 Calculate a budgeted cost driver rate
based on budgeted cost and budgeted
activity.
3 Produce a budget for each department
or product by multiplying the budgeted
cost driver rate by the expected usage.
Approaches to budgets
44 kaplanpublishing
Approaches to budgets Chapter 3
Advantages Disadvantages
Draws attention to the costs of ‘overhead •
activities’.
Draws attention to the actual costs of •
activities.
Assumes that activity costs are variable, •
(long-term).
Emphasises that activity costs may be •
controllable if volume is controlled.
Can be useful for TQM.•
May require considerable time and effort.•
May not be appropriate for all organisations.•
May be difficult to identify responsibilities •
for activities to individual budget holders.
In the short-term many overhead costs are •
not variable.
Approaches to budgetsApproaches to budgets Chapter 3
kaplanpublishing 45
Zero-based budgeting
ZBB is 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’.
The steps
1 Managers specify for their responsibility
centres those activities that can be
individually evaluated.
2 Describe each of the individual activities
in a decision package which should:
• statethecostsandbenefits
expected.
• bedrawnupinsuchawaythatit
can be evaluated and ranked.
3 Evaluate and rank each decision
package, usually using cost/benefit
analysis.
4 Allocate resources to the various
packages.
Definition
Approaches to budgets
46 kaplanpublishing
Approaches to budgets Chapter 3
Advantages Disadvantages
Useful for service departments•
Question activities, identify and remove •
inefficient operations and thus avoid wasteful
spending
Staff involvement•
Attention is focused on outputs in relation to•
value for money.•
Knowledge and understanding of the •
costbehaviour.
Time & cost involved •
Emphasis on short-term benefits to the•
detriment of long-term benefits.•
Management skills needed •
Rankings of packages may be subjective.•
Difficult to compare and rank completely•
different types of activity.•
Approaches to budgets
Approaches to budgets Chapter 3
kaplanpublishing 47
Budgeting in not-for-profit organisations
Main features
No profit motive, but they still need to •
control costs.
Many of the benefits arising from •
expenditure are non-quantifiable.
Often revenue is not generated and •
there is a fixed budget for spending.
Multiple stakeholders give rise to multiple •
objectives so there is a need to prioritise/
compromise.
Objectives may be difficult to define and •
may change as a result of the political
process.
Public sector budgeting
Approaches used
Incremental budgeting is traditional •
approach.
ZBB and • programme budgeting (where
work is broken down into programmes
designed to achieve certain objectives).
Approaches to budgets
48 kaplanpublishing
Approaches to budgets Chapter 3
Tocompeteinthe
informationage,
companies(especially
knowlege-based
companies)mustgo
beyondbudgeting.
Traditionalbudgeting
andbudgetary
controlshouldbe
abolishedasto
timeconsuming,
restrictiveand
bureaucratic.
Manycompanies
havemostoftheir
valueinintellectual
assets,suchas
‘know-how’.aimto
maximisethevalue
oftheseassets.
Thebusiness
environmentis
constantlychanging.
Thebudgeting
systemistoorigid.
Theemphasisin
budgetingison
minimisingcosts,not
maximisingvalue.
BEYOND
BUDGETING
Approaches to budgetsApproaches to budgets Chapter 3
kaplanpublishing 49
Behavioural aspects of
budgeting
The behaviour of individuals in response to
the demands of budgeting and budgetary
control can damage the process.
Dysfunctional behaviour
Individual managers seek to achieve •
their own objectives rather than the
objectives of the organisation.
Budget slack (or bias)
A deliberate over-estimation of •
expenditure and/or under-estimation of
revenues in the budgeting process.
Recent exam question
June 2008 - Question 2 (written).
Notes:
Exam focus
Definition
Approaches to budgets
50 kaplanpublishing
Approaches to budgets Chapter 3
Behavioural issues
in budgeting
Target setting
Targetsassistmotivationiftheyareattheright•
level.
Targetsshouldbeslightlyaboveanticipated•
performancelevel.
Targetsshouldbe:•
– communicatedinadvance
– controllable,quantifiableandlinked
toappropriaterewardsandpenalties
– chosentoensuregoalcongruence.
Budget difculty
ifthetargetsetistoohighorlow•
thiscanleadtosub-optimal
performance.
Thedegreeofbudgetdifficultyis•
difficulttoestablish.
itdependson:
– natureofthetask
– organisationalculture
– personalityfactors.
1