1. BPP LEARNING MEDIA CIMA P2 Advanced Management Accounting For exams in 2016 江西财经大学会计学院 吉伟莉 499159596@qq.com

2. BPP LEARNING MEDIA Chapter 5 Decision making in responsibility centres —Divisionalisation —Responsibility accounting —Budgetary control —Controllable/uncontrollable costs —Behavioural aspects —Beyond budgeting

3. There are two common ways of structuring organisations: —Functionally —Divisionally —In general, a divisional structure will lead to decentralisation of the decision-making process Divisionalisation 1

4. Advantages of divisionalisation —It can improve the decision-making process in two ways: —Quality —Speed —The authority to act to improve performance should motivate divisional managers —Top management are freed up from day-to-day operations and can devote more time to strategic planning —Divisions provide valuable training grounds for future members of top management Divisionalisation 2

5. Disadvantages of divisionalisation Dysfunctional decision-making —A balance has to be kept between decentralisation of authority to provide incentives and motivation, and —Retaining centralised authority to ensure goal congruence —Increase in costs of activities common to all divisions —Loss of control by top management Divisionalisation 3

6. Responsibility accounting —A system of decentralised authority —Performance of the decentralised units measured in terms of accounting results —This involves tracing costs (and revenues, assets and liabilities, where appropriate) to the individual managers who are primarily responsible for making decisions about controlling the costs in question —The system must therefore distinguish between controllable costs and uncontrollable costs Responsibility accounting 1

7. Controllable costs —Can be influenced by the budget holder Variable costs —Yes in the short term Fixed costs —No in the short term or discretionary or directly attributable Assets/liabilities —To the extent the manager can increase/reduce them Responsibility accounting 2

8. —There are three types of responsibility accounting unit/responsibility centre —Cost centre —Profit centre —Investment centre Responsibility accounting 3

9. Fixed budgets —Prepared on the basis of an estimated volume of production and an estimated volume of sales —No variants of the budget are made to cover the event that actual and budgeted activity levels differ —They are not adjusted (in retrospect) to reflect actual activity levels Budgetary control 1

10. Budgetary control —Budgets are established which identify areas of responsibility for individual managers —These regularly compare actual results against expected (using a flexible budget) —The resulting variances provide guidelines for management control action Budgetary control 2

11. Flexible budgets —Budgets which, by recognising different cost behaviour patterns, change as activity levels change —Flexible budgets can be drawn up to show the effect of actual volumes of output and sales differing from budgeted volumes — At the end of a period, actual results can be compared to a flexed budget —Flexed budget is what results should have been at actual output and sales volumes as a control procedure Budgetary control 3

12. Budgetary control 4

13. Procedure —Decide whether costs are fixed, variable or semi- variable —Split semi-variable costs into their fixed and variable components using the highlow method —Flex the budget to the required activity level Budgetary control 5

14. Budgetary control 6

15. Workings 1)37,500 × (1,500,000/50,000) 2)Material costs are variable —Costs per unit = $375,000/50,000 = $7.50 —Budget cost allowance = $7.50 × 37,500 3) Labour costs are variable —Cost per unit = $450,000/50,000 = $9 —Budget cost allowance = $9 × 37,500 Budgetary control 7

16. Workings continued 4)Production overhead is a semi-variable cost —At 90%, activity level = 50,000 × 0.9 = 45,000 units —Variable cost of (50,000 – 45,000) units = $(130,000 – 120,000) — ∴ Variable cost per unit = $10,000/5,000 = $2 — ∴ Fixed cost = $(130,000 – (50,000 × $2)) = $30,000 —Budget cost allowance = $(30,000 + (37,500 × $2)) 5) Administration overhead is a fixed cost Budgetary control 8

17. Budgetary control reports —Budget holders must receive these regularly, so they can monitor the budget centre’s operations and take necessary control action How can computers help with budgetary control? —Calculation of flexed budget —Detailed variance analysis —Speedy production of control information Budgetary control 9

18. —Managers of responsibility centres should only be held accountable for costs over which they have some influence —A distinction is therefore made between controllable and uncontrollable costs —Most variable costs are controllable in the short term —Some fixed costs are discretionary but most are uncontrollable in the short term —Directly attributable fixed costs are fixed in the short term within the relevant range —However a drastic reduction in a department’s output, say, would reduce/remove them Controllable/uncontrollable costs 1

19. —A cost uncontrollable by a junior manager might be controllable by a senior manager (e.g. overtime) —A cost uncontrollable by a manger in one department may be controllable by a manager in another (see example) Example —An increase in material costs might be caused by buying at higher prices than expected (controllable by the purchasing department) or —By excessive wastage/spoilage (controllable by the production department) Controllable/uncontrollable costs 2

20. Budgets as a source of conflict —Budgeting is a multi-purpose activity and so it means different things to different people Budget purposes —A forecast —A means of allocating resources —A yardstick —A target Conflict is therefore inevitable Behavioural aspects 1

21. Negative affects of budgets include: At the planning stage —Managers may fail to coordinate plans with those of other budget centres —They may build slack into expenditure estimates When putting plans into action —There could be minimal cooperation and communication between managers —Managers might try to achieve targets but not beat them Behavioural aspects 2

22. Negative aspects of budgets continued Using control information —Resentment could occur: —Managers seeing the information as part of a system of trying to find fault with their work —Scepticism of the value of information if it is inaccurate, too late or not understood could arise Behavioural aspects 3

23. Participation Budget setting styles —Imposed (from the top down) —Participative (from the bottom up) —Negotiated Behavioural aspects 4

24. Advantages of participative approach —More realistic budgets —Coordination, morale and motivation improved —Increased management commitment to objectives Disadvantages of participative approach —More time-consuming —Budgetary slack may be introduced —Can support ‘empire building’ Behavioural aspects 5

25. Performance evaluation —An important source of motivation to perform well —This means achieving budget targets, eliminating adverse variances —Being kept informed about how actual results are progressing compared with target Behavioural aspects 6

26. Ways of using budgetary information to evaluate performance —Budget-constrained style —Profit-conscious style —Non-accounting style —Despite conventional assumptions, research suggests accounting performance measures lead to a lack of goal congruence Behavioural aspects 7

27. Budgets as targets —Can budgets, as targets, motivate managers to achieve a high level of performance? —Ideal standards are demotivating because adverse efficiency variances are always reported —Low standards are demotivating because there is no sense of achievement in attainment, why try harder? —Normal levels of attainment encourage budgetary slack Behavioural aspects 8

28. Budgetary slack —The difference between the minimum necessary costs and the costs built into the budget or actually incurred —Managers might deliberately overestimate costs and underestimate sales so that they will not be blamed for overspending and poor results Behavioural aspects 9

29. —To ensure managers are properly motivated, two budgets can be used: —One for planning and decision making, based on reasonable expectations (expectations budget) —One for motivational purposes, with more difficult targets (aspirations budget) Behavioural aspects 10

30. —Beyond Budgeting is a set of guiding principles that propose abandoning traditional budgets —An alternative is a general management model based on decentralised decision making —This means personal responsibility, maximising value and adaptability to change —Beyond Budgeting principles seek to enable organisations to manage performance and decentralise decision-making —This is done by moving to a culture of personal responsibility/adaptive management processes —All taking place in a fast changing, modern environment of unpredictable conditions Beyond Budgeting 1

31. —Two fundamental concepts underlie the Beyond Budgeting approach: —Adaptive management processes —Devolved organisation and decision making Beyond Budgeting 2

32. Criticisms of traditional budgeting —Budgets are time consuming and expensive —Budgets provide poor value to users —Budgets fail to focus on shareholder value —Budgets are too rigid and prevent fast response —Budgets protect rather than reduce costs —Budgets stifle product and strategy innovation Beyond Budgeting 3

33. Criticisms of traditional budgeting continued —Budgets focus on sales targets rather than customer satisfaction —Budgets are divorced from strategy —Budgets reinforce a dependency culture —Budgets lead to unethical behaviour Beyond Budgeting 4

34. —Under adaptive management processes managers are: —Not tied to fixed targets —Expected to add value and deliver continuous performance improvement —Respond to changing conditions evaluated on relative improvement based on a range of relative indicators —Also taking account of conditions under which manager was operating —Given resources they need and also where cross company activities are co-ordinated Beyond Budgeting 5

35. Beyond Budgeting 6

36. —Under devolved networks managers: —Operate in a governance framework based on —clear principles, values and strategic boundaries —ethical behaviour —openness within the organisation —They are expected to use initiative and local knowledge —They are fully accountable for customer satisfaction and a high level of relative success Beyond Budgeting 7

37. Beyond Budgeting 8