1. BPP LEARNING MEDIA CIMA P2 Advanced Management Accounting 熊家财 xiongjc-p@163.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. BPP LEARNING MEDIA 迎评工作 一 Section 1 Divionalization 3

4. BPP LEARNING MEDIA 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

5. BPP LEARNING MEDIA Divisionalisation Decentralization structure

6. BPP LEARNING MEDIA 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

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

8. BPP LEARNING MEDIA 迎评工作 一 Section 2 Responsibility centers 8

9. BPP LEARNING MEDIA – RA is a system of accounting – that segregates revenue and cost into areas of personal responsibility – in order to monitor and assess the performance of each part of an organization Responsibility accounting Definition

10. BPP LEARNING MEDIA Responsibility accounting Types

11. BPP LEARNING MEDIA Responsibility accounting Cost centres

12. BPP LEARNING MEDIA Responsibility accounting Cost centres Two important points: - The report only include controllable costs - The actual cost are compared with a budget that has been flexed to the actual activity level achieved - Fixed budget used for the control of discretionary costs

13. BPP LEARNING MEDIA Responsibility accounting Revenue centres - The manager is responsibility only for raising revenue - sales centre - Not-for- profit organizations

14. BPP LEARNING MEDIA Responsibility accounting Profit centres - A business accountable for both costs and revenues

15. BPP LEARNING MEDIA Responsibility accounting Investment centres - A profit centre with additional responsibility for capital investment and possibly for financing, whose performance is measured by its return on investment - subsidiary company - The profit earned is relate to the amount of capital invested. - return on capital employed (ROCE) - return on investment (ROI) - residual income (RI)

16. BPP LEARNING MEDIA 迎评工作 一 Section 3 Budget control 16

17. BPP LEARNING MEDIA 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

18. BPP LEARNING MEDIA 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

19. BPP LEARNING MEDIA 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

20. BPP LEARNING MEDIA Budgetary control

21. BPP LEARNING MEDIA Procedure for flexible budget —Decide whether costs are fixed, variable or semi- variable —Split semi-variable costs into their fixed and variable components using the high-low method —Flex the budget to the required activity level Budgetary control See example in page 224

22. BPP LEARNING MEDIA Production overheads is semi-variable cost, cost for an activity level of 10, 000 units being $25,000 Budgetary control Example

23. BPP LEARNING MEDIA Budgetary control Example Sales volume contribution variance Selling price variance Expenditure variance

24. BPP LEARNING MEDIA Budgetary control Example

25. BPP LEARNING MEDIA How can computers help with budgetary control? —Calculation of flexed budget —Detailed variance analysis —Speedy production of control information Budgetary control

26. BPP LEARNING MEDIA Link between standard costing and budget flexing - Standard costing variance analysis id more detailed - price variance - different usage of materials - flexible budget: total cost variance - determine a standard unit cost for all items of output - understanding of cost behaviour patterns - a measure of activity Budgetary control

27. BPP LEARNING MEDIA —Managers of responsibility centres should only be held accountable for costs over which they have some influence —Controllable costs: - costs which can be controlled, typically by a cost, profit, or investment centre manage Controllable/uncontrollable costs

28. BPP LEARNING MEDIA —Most variable costs are controllable in the short term - A cost which is not controllable by a junior manager might by controllable by a senior manager - A cost which is not controllable by a manager in one department may be controllable by a manager in another —Non-controllable costs —Other costs are controllable in long term, rather than the short term - production costs Controllable/uncontrollable costs

29. BPP LEARNING MEDIA —Fixed costs - committed fixed cost - discretionary costs —Controllability and apportioned costs - rent and rate for the building - costs of the maintenance department Controllable/uncontrollable costs

30. BPP LEARNING MEDIA - A section of an entity for which control may be exercised through budgets prepared. - Well- organized system of control - A hierarchy of budget centre - Clearly identified responsibilities for achieving budget targets - responsibilities for revenues, costs, and capital employed Budgetary control system Budgetary centre

31. BPP LEARNING MEDIA Budgetary control reports —Budget holders must receive these regularly, so they can monitor the budget centre’s operations and take necessary control action —Amount of detail Budgetary control system

32. BPP LEARNING MEDIA 迎评工作 一 Section 4 Behavioral implication of budgeting 32

33. BPP LEARNING MEDIA Purposes: - assist management in planning and controlling the resources of their organization by providing appropriate control information. Useful: - content of the information provided - behaviour of its recipients (their attitude to control information) Behavioural aspects Budgets and provision of control information:

34. BPP LEARNING MEDIA Behaviour problem: - the manages who set the budget are often not the managers who are then made responsible for achieving budget targets - the goal of the organization as a whole, as expressed in a budget, may not coincide with the personal aspiration of individual manager - control is applied at different stages by different people Behavioural aspects Budgets and provision of control information:

35. BPP LEARNING MEDIA -Ideal standard: attained under perfect operating: no wastage - Attainable standard: attained if production is carried out efficiently -Current standard: based on current working conditions -Basic standard: long-term standard, which is used to show trend Behavioural aspects Budgets and Standards:

36. BPP LEARNING MEDIA At the planning stage —Managers complain that they are too busy —may build slack into expenditure estimates —Formalize a budget plan on a paper is too restricting —may fail to coordinate plans with those of other budget centres —May base future plans on past results Behavioural aspects Motivation:

37. BPP LEARNING MEDIA When putting plans into action —Managers might try to achieve targets but not beat them —Encourage rigidity and discourage flexibility —Short-term planning —minimal cooperation and communication between managers —Spend up to their full budget allowance, and don’t overspend Behavioural aspects Motivation:

38. BPP LEARNING MEDIA Using control information —Managers see control reports as a low priority in task list —Managers seeing the information as part of a system of trying to find fault with their work —Seen as pressure devices —Scepticism of the value of information if it is inaccurate, too late or not understood could arise —Manager hold responsible for uncontrollable variance Behavioural aspects Motivation:

39. BPP LEARNING MEDIA 迎评工作 一 Section 5 Budget participation 39

40. BPP LEARNING MEDIA Participation Budget setting styles —Imposed (from the top down) —Participative (from the bottom up) —Negotiated Budget participation

41. BPP LEARNING MEDIA Budget participation

42. BPP LEARNING MEDIA Budget participation

43. BPP LEARNING MEDIA Effective circumstances: - newly formed organizations - very small business - during periods of economic hardship - when operational managers lack budgeting skills - when the organization’s different units required precise co-ordination Behavioural aspects

44. BPP LEARNING MEDIA Advantages of imposed approach —Strategic plan incorporated into planed activities —Enhance co-ordination —Use senior manager’s awareness of total resource availability —Decreased the input from inexperienced or uniformed low-level employee —Decrease the period of time to draw up budget Behavioural aspects

45. BPP LEARNING MEDIA Disadvantages of imposed approach —Dissatisfaction, low morale among employee —Acceptance of organizational goal could be limited —Feeling of budget as a punitive device could arise —Unachievable budget —Lower-level management initiative may be stifled —Lower-level management have a better understanding Behavioural aspects

46. BPP LEARNING MEDIA Budget participation

47. BPP LEARNING MEDIA 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

48. BPP LEARNING MEDIA 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 Budget participation

49. BPP LEARNING MEDIA 迎评工作 一 Section 6 Budget as targets 49

50. BPP LEARNING MEDIA 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 Budgets as targets

51. BPP LEARNING MEDIA —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) Budgets as targets

52. BPP LEARNING MEDIA 迎评工作 一 Section 7 Budget and motivation 52

53. BPP LEARNING MEDIA -Is motivation from budget ever possible -Support from senior management -Support from the management accountant Budget and motivation

54. BPP LEARNING MEDIA 迎评工作 一 Section 8 Beyond Budget 54

55. BPP LEARNING MEDIA —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

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

57. BPP LEARNING MEDIA 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

58. BPP LEARNING MEDIA 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

59. BPP LEARNING MEDIA Adaptive management : —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

60. BPP LEARNING MEDIA Beyond Budgeting 6

61. BPP LEARNING MEDIA —Under devolved networks managers: —Operate in a governance framework based on —clear principles, values and strategic boundaries —ethical behaviour beneficial to the organization —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

62. BPP LEARNING MEDIA Beyond Budgeting 8

63. BPP LEARNING MEDIA Beyond Budgeting implementation

64. BPP LEARNING MEDIA 程序原则 1 ． 目标 —— 设定旨在持续改进的目标，而不是固定的年度目标。 2 ． 报酬 —— 报酬建立衡量企业成功的相对业绩的基础上，而不 是建立在满足固定的目标值的基础上。 3 ． 计划 —— 使计划成为一个持续的综合的过程，而不是一个年 度事件。 4 ． 控制 —— 以相关的关键业绩指标和业绩趋势为基础进行控制， 而不是以与计划的差异为基础。 5 ． 资源 —— 资源在需要时要可获得，而不是通过预算来配置。 6 ． 协调 —— 要协调公司间的相互作用，而不是通过年度计划循 环。 Beyond Budgeting

65. BPP LEARNING MEDIA 领导层原则 1 ． 客户 —— 使每一个人都要关注如何提高客户效用，而不是仅 仅为达到内部目标值。 2 ． 责任 —— 创造一个团队网络对结果负责，而不是中央负责。 3 ． 业绩 —— 冠军的成功要表现在市场上获胜，而不是达到内部 目标。 4 ． 执行自由度 —— 给团队充分自由和能力去执行，而不仅仅是 要求去计划相符。 5 ． 治理 —— 基于明确的价值观和组织边界之上，而不是基于详 细的规则和预算 。 6 ． 信息 —— 支持信息的公开和共享，对 “ 需要知道 ” 信息的人不加 以限制。 Beyond Budgeting