1/33
Looks like no tags are added yet.
Name | Mastery | Learn | Test | Matching | Spaced |
---|
No study sessions yet.
What is performance mgmt?
Any activity designed to improve an organisationās performance and ensure goals are being met.
Budgeting in perf management
It is an important tool for planning and control within an organisation and contributes to perf management by providing targets against which to compare actual results (thrg variance analysis) and develop corrective measures.
Method of budgeting
Fixed and flexible budgets
incremental budgets
zero based budgets
rolling budgets
activity based budgets
What is top-down budget
Non-participative budget is imposed on the budget holder by senior management.
budget holder does not participate in budget setting process
advantages and disadvantages of top-down
advantages:
senior managers retain control
budget setting process can be quicker
avoids budgetary slack
avoids dysfunctional behaviour (divisional manager lack strategic perspective, focus on division needs and may not be in line with corp obj.
disadvantages
lack of acceptance from divisional managers
takes up more time for senior mgmt
senior managers may have lack local knowledge & not fully appreciate what is actually achievable in each division
bottom up budget
participative budget involves budget holders in the setting of budget
Adv & dis of bottom-up budget
Advantages:
improved motivation due to sense of ownership and empowerment
increases divisional managersā understanding
frees up senior mgmt resource
improves quality of decision making since division managers r close to their product markets
Disadvantages:
lead to budgetary slack
lead to dysfunctional behaviour
senior managers lose control
budget setting more time-consuming
lead to bad decisions from inexperienced managers
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 (e.g. an extra worker or additional machine).
When is incremental budget suitable?
Stable business in which costs not expected to change significantly
should be good cost control (managers efficient in controlling costs, work hard to be efficient and to eliminate waste)
limited discretionary costs (avoidable costs such as training, r&d
non-essential nature means that inclusion in the budget should be justified rather than automatic
advantages of incremental budget
quickest and easiest and low cost
assume historic fig are acceptable only increment needs to be justified
avoids reinventing the wheel if env is table and therefore costs are not expected to change sig
works weel in an env where there is good cost control and or limited discretionary costs
disadvantages of incremental budget
backward looking
builds in previ problems, inefficiencies and wastage
increments does not encourage managers to be more efficient in controlling costs, reduce waste or to find new innovative ways of doing things
activities do not have to be justified and so uneconomic activities may be continued
managers may build in slack
managers may spend up to their budget (to ensure they get an increment from the highest possible base figure)
Zero based budgeting
a method of budgeting that requires each cost element to be specifically justified. Without approval, the budget allowance is zero.
suitability of zero based budgeting
Fast moving (dynamic) businesses/industries.
For allocating resources in areas of discretionary spending
Public sector organisations such as local authorities. These organisations have strict constraints on the amount of funding they receive, and this funding should be put to the best use
process of ZBB
1 Determine the activities that are to be used as the objects of a decision package
2.Each of the individual activities is then described in a decision package (purpose of activity, cost and benefits expected from given activity). drawn up in such a way package can be evaluated and ranked against other packages
3 Each decision package is evaluated and ranked using cost/benefit analysis
4 The resources are then allocated to the various packages based on the order of priority
advan and disadvan of ZBB
adv:
resources should be allocated efficiently and economically
inefficient or obsolete operations will be identified and discontinued or budgetary allocation altered
ZBB leads to increased staff involvement at all levels. should lead to better comm & motivation
responds to changes in bus. environ. & so is more suited in fast moving org/ industries
knowledge & understanding of cost-behavoir patters of org will be enhanced
disadv:
time consuming and costly (profit seeking org unlikely to use) rather use in particular area
may emphasise short term benefits to detriment of long-term benefit
budgeting process may become too rigid, and company may not be able to react to unforeseen opp or threats
need for mgmt skills that may not be present in org
managers may feel demotivated due to large amount of time spent on budgeting process
difficult to compare and rank diff types of activity
rankings of packages may be subj. where benefits are of a qualitative nature
rolling budgets suitability
when Accurate forecasts cannot be made, e.g. in a dynamic business environment or in a new business.
For any area of business that needs tight control since the budget should be more realistic and accurate.
advantages of rolling budgets
planning and control based on a more accurate budget
much better info upon which to appraise the perf of mgmt, rolling budgets reduce the elements of uncertainity since they concentrate on the short-term
always a budget that extends for a fixed period into the future
forces mgmt to take the budgeting process more seriously. budget is reassessed and update regularly
disadvantages of rolling budget
more costly and time consuming
an increase in budgeting work may lead to less control of the actual results
danger that budget may become the last budget plus or minus a bit
may be demotivating because tartes are changed regularly and/ or employees feel they spend a large proportion of their time budgeting
advantages of ABC
provides a more accurate cost per unit since it recog overhead costs are not all related to prod and sales vol. leading to better pricing, decision making, perf mgmt & control
costs are categorised by activities and provides more relevant info to managers
better insight into what drives overhead costs = better cost control
applied to all overhead costs not just prod overhead
can be used just as easily in service costing as prod costing
disadvantages of ABC
benefits might not justify cost (initial setup cost, staff train cost, cost of potential staff resis, cost of changing system to capture info require and ongoing cost of using ABC) especially if overheads are primarily volume related or small proportion of total costs.
impossible to assign all overheads to specific activities
choice of cost drivers may in inappropriate
may be difficult to assign responsibility for individual cost pool
limited benefit if activity costs are already well-controlled and process is already efficient
customers may not tolerate changes made as a result of the exercise i.e. price increase
what is abc?
ABC budgeting prepares budgets using overhead costs derived from activity based costing.
What is ABM?
Activity based management is the use of ABC information for management purposes to improve operational and strategic decisions. It applies ABC principles in order to satisfy customer needs using the least amount of resources.
Operational ABM advantages
ABM can help operational managers make decision that can improve operational efficiency and hence performance:
1. It may identify and then reduce or eliminate activities that do not add value to customer and refocus on value adding activities. this cut costs without reducing product value
find ways to continually improve value-adding activties. abm may establish ways to produce prod more efficiently by understanding what drives cost of activities and find ways to reduce the incidence of these cost drivers without impacting quality.
may identify design improvement e.g change in des. to prevent quality prob and associates costs such as wastage
Risks related to use of oprtational ABM
Some activities will have an implicit value that is not necessarily reflect in the financial value. e.g. pleasant workplace = retain/attract talent but risk of op abm is that this abm is eliminated
Strategic ABM
ABC information helps managers determine which products to sell and develop and based on profitability (product profitability)
identify the underlying cost drivers which helps understand the resource implication of various course of actions. This prevents us from choosing unfeasible course of action and eliminate non-profit making products
helps re-pricing
helps set price of new products
assists in building better relationship with customers & suppliers through working closely with Customer to understand their needs & with Suppliers to improve quality cost
customer profitability analysis (CPA) apportioning overheads to diff types of customer. understands which customer should be focused on and where cost efficiencies can be made.
ABB?
Activity based budget uses costs determined in ABAC to prepare budgets for each activitiy.
1. cost driver for each activity is identified. A forecast is made of the no. of units of the cost driver that will occur in the budget period.
Given the estimate of the no. of units of cost driver, the activity cost is estimated.
advantages of ABB
ABB draws attention to costs of overhead activities which can be a large propor. of total operating costs
Recog that it is activities that drives costs. if we can control the drivers then costs would be better managed and understood
can be used to identify csfs, e.g. a specific activity that must be done efficiently or accurately
provides useful information for TQM environment by relating cost of an activity to the level of service provided. focuses on controlling costs without neg impact on quality.
disadvantages of ABB
time consuming and takes effort to establish an ABB system
staffing issues e.g. resistance to change or cost of training staff
cost of adapting information system so they can collect and process large amount of activity and cost driver infromaiton
ABB might not be appro. for org and its activtiies and cost structure
difficult to identify indivi respon for acitivties and hence, accoutnability for achivement of acitvity budget
can be argued short term many overhead costs are not controllable and do not vary directly wtih changes in volume of activity of the cost driver
Fixed budget vs flexible budget
A fixed budget is a budget prepared at a single level of activity. A flexible budget is prepared at a number of activity levels and can be 'flexed' or changed to the actual level of activity for budgetary control purposes.
planning variance
Difference between original standard and revised one. cause by inaccurate forecasts/ standards in org budget setting.
operational variance
diff between revised standard and actual performance. Due to decisions by operational managers
advantage & dis of splitting plan & op variance
Adv: Line managers can concentrate on improving op matters for which they are truly responsible and accountable.
Dis: too often all adverse var. are explained away as planning errors
if revised standard is harder to achieve than org. manager could become unmotivated by moving target
What is BB?
Beyond Budgeting is an approach to PM and control that tries to resolves weakness and limitation of traditional approaches to budgeting.
principles of BB
Governance and transparency
employees bound by clear org mission and set of values (common cause) rather than a central plan
governance is through shared values and sound judgement
information is open and transparent
accountable teams
org consists of network of AT who are empowered & trusted to regulate their perf w/ limited centralised and hierarchical control & no micro mgmt
team managers & employees are given high degree of freedom to make decisions tht generate value
teams r responsible for relationship w customers, suppliers and other stakeholders
budgets may be used but these will be set at local level (bottom up)
Goal, targets and rewards
managers will be given a range of challenging but controllable, goals and targets linked to shareholder value
targets often based on external benchmarks
innovation and continuous improvement is encouraged and rewarded
planning and control
planning is continuous and inclusive process
rolling budgets may be used.
focus is not future not past events. controls r based on fast, frequent feedback and not budget variances