1. Understanding and Managing Finance 11 This Presentation is in Self-Study Form To start the presentation: Press F5 (Top Row of Keyboard) Then use the navigation buttons at the foot of each page.

2. Managing Finance and Budgets Lecture 11 Budgetary Control

3. Session 10 – Budgetary Control Objectives By the end of this week, you will:  Be able to discuss how a budget is constructed.  Be able to state different budgeting principles, and how these might be used in different situations.  Know how budgetary targets might be used as controls.  Be able to discuss some of the ways in which managers react to budgetary targets  Know some of the non-financial measures used in budgeting.

4. Menu  A : The Budget-Setting ProcessThe Budget-Setting Process  B : Approaches to BudgetingApproaches to Budgeting  C : Monitoring & Controlling PerformanceMonitoring & Controlling Performance  D : Behavioural IssuesBehavioural Issues  E : Using Non-Financial MeasuresUsing Non-Financial Measures  F : Follow-up workFollow-up work

5. Section A: The Budget-Setting process

6. The Budgetary Context  Last week, we saw that the creation of a budget is simply one element in the Planning & Control Process.Planning & Control Process  This process sees a budget as both a planning tool and a means of control.  We looked at planning in the last presentation; in this presentation we will concentrate mainly on the control element.  Before we do this, this section will look in a bit more detail as to how precisely budgets are created.

7. 1. Identify key objectives 2. Identify available options 5.Collect information and control 4. Prepare detailed plans or budgets 3. Evaluate and select options The Planning & Control Process – a summary Mission, Aims, Objectives Market, Products, Services Sales, Costs, Profits, Returns Limiting factors: External & internal Environment - market size, production capability, competition Markets, products, financing, physical resources, human resources Short-term plans: Sales, Cash, Stock, Labour, Production  Master budget Identify variances and respond as appropriate

8. Steps in the budget setting and control process 1. Establish responsibility for the budget-setting process 4. Prepare the budget for the area of the limiting factor 5. Prepare draft budgets for all other areas 8. Communicate the budgets to all interested parties 2. Communicate budget guidelines to relevant managers 3. Identify the key or limiting factor 6. Review and co-ordinate budgets 7. Prepare the master budgets 9. Monitor actual performance relative to the budget 10. Act to ensure performance conforms to the budget Click on each box for an explanation

9. Step 1: Establish Responsibility  Normally, this is the work of a Budget Committee, consisting of a senior representative of each of the important areas (Sales, Production etc.)  Often a Budget Officer is appointed to carry out tasks required by the committee.  This person is often an accountant.

10. Step 2: Communicate Guidelines  At this stage, all previous work (e.g. strategic planning, overall business objectives for the year) are communicated to the heads of the various departments.  This will normally be an interactive process, and heads of departments will often have played an important part in drawing up the planning documents.  At this stage, it may be the case that each departmental or section head will be asked to prepare a draft budget for the following year for their area, as a ‘bid’ for funding, within the guidelines set. (This may also occur later – at step 5)

11. Step 3: Identify the Limiting Factor  The Key or Limiting Factor is the aspect of business that is crucial to it achieving the objectives set.  For many businesses this is sales; however in some circumstances it may be labour, or even the ability to maintain supplies of raw materials. It may even be, a cash flow issue, where an overdraft needs to be carefully managed.  Clearly this will need to be as a result of detailed analysis of the current position.  It should also be noted that the Limiting Factor may change from year to year.

12. Step 4: Prepare the Budget for the Limiting Factor  Often, this is simply preparing the Sales budget. If so, it would be based on market research and on evidence from sales in past years*.  If the Limiting Factor is another area, clearly, the capacity of the business to operate in that area would need very careful analysis of the available evidence to ensure that the information is as accurate as possible.  This factor will now define the overall activity level of the business for the next 12 months. *N.B. In research by Dury et. al, 1993, 85% of all businesses based such targets on opinions of sales staff. (see M & A. p 368)

13. Step 5: Prepare draft budgets for all areas  Once the details of the Limiting Factor Budget are known, other budgets can then be prepared.  Two methodologies can be employed: 1. A Top-Down approach: Senior management of each area originates the targets, then filters then down, requiring managers lower down to prepare budgets which conform to these targets. 2. A Bottom-Up approach: Targets are fed upwards from the lowest levels, then negotiate with the manager higher up in order to achieve a budget which conforms to the constraints set by the limiting factor.  The Bottom-Up approach clearly involves more effort, and may result in several rounds of negotiation at different levels before agreement is reached. It does however hold the promise of achieving greater consensus.

14. Step 6: Review & Co-ordinate  All budgets are submitted to the Budget Committee for scrutiny, to ensure that they are complementary, and dovetail together well.  Where discrepancies occur, the budget committee will exert its authority and budgets will be returned for amendment.

15. Step 7: Prepare Master Budgets  The Master Budgets are normally:  The budgeted Profit & Loss account  The budgeted Balance Sheet  Possibly a Budgeted Cash Flow  This work is undertaken by the budget committee.

16. Step 8: Communicate Budgets  The budgets agreed by the committee are now passed to individual managers.  Normally this is filtered down through senior, middle and junior management layers, to the budget holder.

17. Step 9: Monitor Performance  Monitoring of performance may be carried out weekly, monthly or quarterly.  Examination of actual performance against targets will be done by the budget holder – the person responsible for the budget, and the target.  Where there is significant variation from the budgeted value, managers would be expected to act.

18. Step 10: Ensure Performance matches the Target  This is the process of control.  There are two ways in which we may match performance with target: Modifying behaviour: it may be clear that an ‘overspend’ is occurring, or that predicted sales are not being achieved. If so, curbs to spending must be put in place, and sales campaigns re-energised. Modifying the target: it may become clear that targets were unrealistic. If so, new targets must be negotiated, and a new budget issues with amended targets. This would undoubtedly have repercussions elsewhere in the business.  The latter part of this presentation concerns itself with the details of this process.

19. SAQ 10.1 Why do you think the process for budget setting so complex? Why, for example could not one person (for example, the finance director) decide on the budget then just tell everyone? Solution

20. SAQ 10.1 There are two main reasons:  Firstly, whoever is in charge of the budget needs to have as full a picture as possible before setting it. That requires consultation and lots of discussion.  Secondly, individual budget holders have to believe in the budget, and understand their relationship with the whole. This can only be done through a process of discussion & negotiation. NB In fact, in many SMEs, ‘one person deciding on the budget and then telling everyone else’ is good description of what happens. This may not be the best way, however!

21. Section B: Methods of Budget-Setting

22. Methods of budget-setting  In the previous section, we looked at the process by which a budget comes into being.  Here we look at the different budgeting methods and principles.  These methods may be used across the whole of a company, or particular parts of it, and the methods used may vary from year to year, depending upon the circumstances.

23. Budgets – Time horizons Periodic budget  This is a one-off budget set for a year (e.g.)  It is normally broken down into monthly or weekly amounts Continual Budget  This will be updated continually (still for one year, but a new month will be added to replace the one which has passed.)

24. Methods used in budget-setting Incremental Budgeting: - same as last year with a bit added Zero Base Budgeting - budget holders required to justify why any money is needed Activity Based Budgeting - those responsible for activities which incur costs hold the budgets Standard costing - standard quantities & costs used to generate targets. Sensitivity Analysis - computer software used to answer ‘what-if’ questions.

25. Incremental Budgets Zero-Base Budgets Activity-Based Budgets Standard Costs Different Forms of Budgeting Sensitivity Analysis Click on each box for a fuller explanation SAQ 10.2

26. Incremental Budgeting  Traditional form of budgeting, common in local & central government  Costs and allocations of monies tend to be on a ‘historical’ basis, i.e. what happened in previous years  Adjustment (increments) are made on the basis of changes (e.g. inflation, increases in productivity, workforce etc.) that happen from year to year.  Often used for ‘discretionary’ budgets (i.e. where budget holder is responsible for allocating a sum of money within a department)  No clear relationship between the input or output (e.g the raw materials required or the level of sales produced)

27. Zero-Base Budgeting (ZBB)  Draws on the philosophy that ALL spending needs to be justified.  All budgets are allocated a zero base, and will be increased from this only if a good case can be made out for the money  Senior management will be using the criterion of ‘value for money’ to allocate scarce resources.  ZBB encourages managers to adopt a questioning approach; this leads to more strategic thinking and allocation of resources to enable this strategy to happen  Clear links required between input/output and the resourcing

28. Activity-Based Budgeting (ABB)  Derives from the philosophy of Activity-Based Costing, that it is activities which drive costs. This is applied to the the Budget process.  If ‘cost-driving’ activities can be identified, then the cost of the output can be achieved more accurately)  Central feature: budget holders (those who are responsible for meeting a particular budget) have control over the events that affect performance in their area.  ABB tries to generate budgets in such a way that the manager who has control over these cost drivers is accountable for the costs.  Typical problems: increased levels of activity generated from outside the manager’s control, e.g. Manufacturing Budget thrown into disarray by a new sales contract

29. Standard Costing  Embodies the idea that standard quantities and costs can be planned for individual units such as sales items, labour rates, raw materials etc.  The standards are targets, and become benchmarks by which actual performance s measured.  The targets may be derived from experience, market assessments, current rates (e.g. labour, fees etc.), but should be realistic.  Variances (differences between the budgeted amounts and the actual amounts) are always based on standards.

30. Sensitivity Analysis This is a tool used in setting technically complex budgets:  It investigates changes to profit due to adjustments in key variables  It identifies key areas for managers to focus on for maximum effect In order to use it, managers need to:  Identify key questions to be answered – e.g. what is the effect on profits of 10% decrease in sales? Or a 10% increase in cost of sales?  Use of spreadsheets or other types of computer software in order to create ‘what-if’ analyses, perform goal- seeking or other complex tasks.

31. SAQ 10.2 1. What do you think might be the advantages and disadvantages of zero-based budgeting? 2.How might any disadvantages be overcome? Solution

32. SAQ 10.2 Solution Advantages Little Wastage of Resources Strategic use of resources, enable plans to be fulfilled more easily Disadvantages Time Consuming Managers can often feel threatened by ZBB The disadvantages might be countered by using the approach selectively, for example only every third year, or on particular budgets which tend to require strategic input, e.g. training, advertising, research & development.

33. Section C: Monitoring & Controlling Performance

34. Budgetary Control Structures Budgets provide a useful mechanism for control.  This starts with the detailed planning within the budget, which forms the basis for exercising control  In addition we need a basis for measuring actual performance against planned performance  Finally in exercising control, we need a means of finding out where and why events deviated from the plan, and ways of rectifying these.

35. The budgetary control process Prepare budgets Perform and collect information on actual performance Respond to variances between planned and actual performance and exercise control SAQ 10.3 Click on each box for a fuller explanation

36. Steps in the budget setting and control process 1. Establish responsibility for the budget-setting process 4. Prepare the budget for the area of the limiting factor 5. Prepare draft budgets for all other areas 8. Communicate the budgets to all interested parties 2. Communicate budget guidelines to relevant managers 3. Identify the key or limiting factor 6. Review and co-ordinate budgets 7. Prepare the master budgets 9. Monitor actual performance relative to the budget 10. Act to ensure performance conforms to the budget Click on each box for an explanation

37. Performance Monitoring Techniques The figures within a budget serve as a basis for measuring the performance of a team or department. The following interrelated techniques can be used:  Simple Performance Comparison Simple Performance Comparison  Flexible Budgeting Flexible Budgeting  Variance Analysis Variance Analysis

38. Simple Performance Comparison  This Budget is part of the Profit and Loss budget for a manufacturing company  The amounts shown represent targets to be achieved for a particular product line during the next 12 months.  This allows us to compare our prediction with what actually happens. Budget Sales (Units): 1000 £ 000Budget Value of Sales 100 Direct Costs Materials 40 Labour 20 Total Direct Costs 60 Gross Profit 40 Overheads Admin Salaries 20 Travel 5 Other costs 20 Total Overheads 45 Net Profit (5)

39. Comparison of Actual Performance (1) Original Budget Actual Figures Sales 1000 Units Sales 1040 Units Original Actual £ 000Budget Figures Value of Sales 100 104 Direct Costs Materials 30 37 Labour 25 24 Total Direct Costs 55 61 Gross Profit 45 43 Overheads Admin Salaries 20 19 Travel 5 8 Other costs 17 17 Total Overheads 42 44 Net Profit 3 (1) Here we can see what has happened at the end of the period: Although we have produced and sold slightly over target, the sharp rise in the cost of materials means that we have made an overall loss. Here we can see what has happened at the end of the period: Although we have produced and sold slightly over target, the sharp rise in the cost of materials means that we have made an overall loss.

40. Comparison of Actual Performance (2) Original Budget Sales (Units): 1000 Actual Sales (Units): 1500 Original Actual £ 000Budget Figures Value of Sales 100 150 Direct Costs Materials 30 47 Labour 25 25 Total Direct Costs 55 72 Gross Profit 45 78 Overheads Admin Salaries 20 27 Travel 5 10 Other costs 17 23 Total Overheads 42 60 Net Profit 3 18 Here the original sales targets have been well exceeded, and we have increased our profits considerably However all is not as well as it seems! Here the original sales targets have been well exceeded, and we have increased our profits considerably However all is not as well as it seems!

41. Flexible Budgeting  If it becomes apparent before the end of the year that there is a huge discrepancy between the actual performance and the budget, it may be necessary to revise targets.  This might happen if there are unexpected surges or slumps in demand, or the economic situation changes.  This does not mean that we dispense with the budget altogether, and write a new one.  Flexible budgeting allows selected targets to be revised.  The revised budget is said to be ‘flexed’.

42. Comparison with Flexed Budget Original Budget Sales (Units): 1000 Actual Sales (Units): 1500 Original Flexed Actual £ 000Budget BudgetFigures Value of Sales 100 150 150 Direct Costs Materials 30 45 47 Labour 25 30 25 Total Direct Costs 55 75 72 Gross Profit 45 75 78 Overheads Admin Salaries 20 20 27 Travel 5 8 10 Other costs 17 17 23 Total Overheads 42 45 60 Net Profit 3 30 18 Here we have written in new targets on the basis of the new sales figures. We can now see that despite the fact that we have increased our profits, this is well below what we should have achieved.

43. Variance Analysis  Used to analyse performance and promote management action  Variance - the difference between the budgeted amount and the actual amount; this can be adverse : the difference will ultimately lead to a reduction in the budgeted profit favourable: the difference will ultimately lead to an increase in the budgeted profit.  Variances might cover: Sales Volume, Pricing, Direct Materials Usage, Direct Materials Price, Direct Labour Efficiency, Direct Labour rate, Fixed Overheads

44. equals minus Actual profit plus All adverse variances All favourable variances Budgeted profit Relationship between the budgeted and actual profit

45. Sample Variance Analyses Sales Volume Variance The difference between the profit as shown in the flexed budget and the actual profit Flexed Budget:Profit :£30,000 Actual FiguresProfit:£12,000 Sales Volume Variance:£18,000 Adverse

46. Typical Variance Analyses carried out Direct Material PRICE variance (Actual material purchased x standard price) less Actual cost of material purchased Direct Material USAGE variance (Standard quantity of material required for actual production x standard price) less (Actual material x standard price Total Direct Material variance Standard direct material cost less Actual direct material cost

47. Direct materials usage variance Direct materials price variance Total direct materials variance Relationship between the total, usage and price variances of direct materials

48. Types of Control There are essentially two types of control used in budget management:  Feedback Control: where the information from actual performance is used to cause actions to be taken to rectify an unfavourable situation.  Feedforward control: where action is taken in advance to anticipate what might occur, and therefore avoid an unfavourable outcome.

49. Key elements for budgetary control  Achievable yet rigorous targets  Accurate, relevant, customised and timely reporting  Short reporting periods (e.g. one month)  Clear lines of responsibility  Accountability of the budget holder  Records of action taken to control operations  Flexibility provided where appropriate  Serious attitude from higher management towards importance, relevance and accuracy of budgets

50. The use of Targets for Control  Targets in themselves are a useful means of control. These are devolved down to junior managers who are able to monitor & self-correct.  Regular upwards reporting of performance to targets means that problems which occur will be relatively minor and easier to deal with.  It is only when large variances occur between targets and actual performance that further investigation & intervention is required.

51. Investigating Variances  This can be expensive in terms of time and money.  Knowing the reason for a variance is only useful if an investigation into its cause can yield a method for rectifying it.  To decide whether this should be done, we can use the statistical notion of significance. In this case, we would regard variance to be significant if it was greater than 5%. In this case: Significant adverse variances will need to be acted upon. Significant favourable variances should be investigated. Insignificant variances should simply be kept under review.  We can only act on variances if the cause of them is known, and there are clear courses of action to be taken

52. Acting on Variances 1 Example 1: In a large retailing company, variance in budgeted Profit & Loss half way through the year shows a projected shortfall in budgeted profit of 15% at year end. This is traced back to a reduction in turnover; sales targets are not being met in the being met in stores in the South West of England. Action Taken Area Sales Manager to meet with Marketing Team; members of the team to focus on particular stores, examining sales records; team to visit & advise, and devise a strategy unique to that store. Targets to be kept under weekly review, Area Sales Manager reporting directly to Financial Director. This is an example of a feedback control, as the unfavourable situation has already occurred.

53. Acting on Variances 2 Example 2: In a small engineering company, variance in budgeted Cash Flow predicts a potential cash-flow crisis in two week’s time, on further investigation this appears to be due to late payment by a valued customer. Action Taken Credit control to contact customer and negotiate payment; however, the payment will arrive too late to avert the cash flow crisis. Bank contacted and alerted to potential problem,. Temporary overdraft facility negotiated. This is an example of a feedforward control, as the unfavourable situation has not yet occurred.

54. Management by Exception The use of budgetary targets is an important way in which decision-making and responsibility can be delegated to junior management. Control is retained by senior management, since they can use the variances to determine which junior managers are meeting or exceeding their targets. This means that energy can be concentrated on those areas which are under-performing – the exceptions. This process is called Management by Exception.

55. SAQ 10.3 Comment on the following: (a)The main function of calculating variances is to provide feedback to managers on performance. (b)All variances should be investigated to find their cause. (c)It is highly valuable to calculate variances because they will tell you what has gone wrong. Solution (a) Solution (b) Solution (c)

56. SAQ 10.3a Solution (a) The main function of calculating variances is to provide feedback to managers on performance. Solution This misunderstands the term ‘feedback’, viewing it simply as “information”. Variances are used dynamically as either feedback or feedforward control mechanisms, so that managers can act either compensate for an already-existing unfavourable situation (feedback), or to prevent one occurring (feedforward). The variances identify what needs to be modified, and can help to suggest courses of action.

57. SAQ 10.3b Solution (b) All variances should be investigated to find their cause. Solution (i) It is extremely unlikely that any budget target will be hit exactly; that is simply a fact of life. To that extent, variances will occur on all targets, even if this is only by a few pounds or pence. If we were to investigate all variances, we would waste a lot of effort and a lot of time. (ii) Investigating variances can be expensive. Significant variances only (greater than 5%), should be investigated, and only then if this appears to promise a course of action.

58. SAQ 10.3c Solution (c)It is highly valuable to calculate variances because they will tell you what has gone wrong. Solution Calculating variances identifies a discrepancy between a predicted amount and an actual amount. If that difference is significant, then it might tell you that something has gone wrong, but the cause might be somewhere else. Investigating variances might (or might not) identify the ‘root cause’ of the problem, but it might not tell you how to rectify it; for example, the discrepancy could be caused by an over-ambitious budget target.

59. Section D: Behavioural Issues

60. Budgets – Behavioural issues This section looks briefly at how managers react when confronted by budgets. We examine  Reaction - Positives and the Negatives Reaction - Positives and the Negatives  How Managers react to Targets How Managers react to Targets  Keys to Successful Budgeting Keys to Successful Budgeting SAQ 10.4

61. Positive Reactions to Budgets Budgets can be:  Motivating - Targets become clear, and if the goals are attainable, this provides a sense of fulfilment in achieving them.  Empowering - budgets set boundaries within which to work; each manager knows their resources, and is able to work autonomously within the limits set to achieve their targets.  Inclusive - where the budget-setting process is dynamic, iterative and based on true negotiation, this can help form a sense of community in which all managers feel that they have a contribution to make, and understand their role within the organisation more fully.

62. Negative Reactions to Budgets Budgets are often seen as:  Restrictive - it becomes more difficult to take advantage of opportunities since the expenditure has already been allocated.  Inflexible - money often needs to be spent within a particular time-frame. It discourages managers from thinking strategically.  Limiting: targets are seen as a maximum instead of a threshold.  Self-defeating: prone to end-of-year expenditure ‘binges’  Confrontational: - they become catalysts for organisational conflict

63. Budgets as performance evaluation Where evaluation of performance is based on the ability of the manager to meet the budget a range of factors occurs: Rigidity – the manager feels straitjacketed by the budget, and restrained from taking risks, as this might create adverse variances. Fixation- There is a focus on budget at expense of other criteria Manipulation: Figures are often ‘massaged’ or distorted in order to present the department in the best light. Exaggeration: Introduction of slack during budget- setting processes

64. Management Styles When confronted by budgets, managers appear to adopt one of three styles:  Budget-constrained style Managers focus only on the targets, and on performance of subordinates in that context; all other issues are deemed irrelevant.  Profit-conscious style Managers use budget information in a flexible way, and in conjunction with other data. Emphasis is on overall improvement; budget data is just one piece in the jigsaw.  Non-accounting style Managers ignore the budget & targets are not seen as relevant.

65. Keys to Successful Budgeting (1) Information is the key:  Aims of budgets must be understood. This means communicating as much of the background ( corporate strategy, short-term objectives, limiting factors) as possible.  Budgets must be seen as attainable. Highest performance is achieved by setting the most difficult specific goals which are acceptable to manager  Control information must be understood, as well as the consequences of targets not being met.

66. Keys to Successful Budgeting (2) Participation is the key:  It is crucial in the budget-setting process to acceptance, job satisfaction and motivation  It is also likely to increase accuracy  It should decrease distortion and manipulation... However:  Managers may deliberately introduce ‘slack’ (I.e. deliberately over-or under estimate items during the budget-setting negotiations)

67. SAQ 10.4 A Sales Manager believes that she could reach her overall sales budget target by reducing prices and selling a higher volume of units. 1. Why might it not be sensible for her to do so? 2. What overall issues does this raise about budget monitoring and control? Solution

68. SAQ 10. 4 Solution (1) A Sales Manager reaches her overall sales budget target by reducing prices and selling a higher volume. This is not sensible because: Production targets will have been set in the production budget; this will involve budgeting for raw materials and labour etc. Suddenly selling more will cause problems elsewhere; this will mean that higher stock levels will be required, and may cause problems with debtors. Similarly, reducing prices will reduce profitability. This will have an effect on the company’s balance sheet, and may ultimately reduce dividends to shareholders.

69. SAQ 10. 4 Solution (2) What overall issues does this raise about budget monitoring and control? Budgets are interrelated, and targets are set to dovetail; individual managers need to know how their targets match with those of others. One way to do this is through a budgetary committee, and participation in the budgetary process. Managers not only need targets, they need to know to what extent under ‘normal conditions’ those targets can be flexed, that is, by how much can we exceed or fall short without a new budget needing to be set?

70. Section E: Non-Financial Measures in Budgets

71. Non financial measures in budgeting  The budget itself tends to be a document which apportions money according to a strategic plan  In manufacturing, the money sets numerical targets for input, throughput and output.  However, in service industries and in other areas such as Education and the National Health Service it is difficult to measure ‘output’ using conventional financial means.  It is increasingly the case that other, non-financial measures are used as a basis for reporting.  Where these relate to ‘hard data’, based on measurable objectives, targets can be incorporated into the budgeting process

72. Examples of Non Financial measures General examples of these include: Product quality Delivery efficiency Supplier quality Supplier delivery Set-up times Throughput times Wastage Customer satisfaction Employee satisfaction

73. Specific Non financial measures There are two specific examples :  Patient Waiting Times in the NHS  Pupil Performance Indicators for Schools In both cases:  These are non-financial Measures which appear as targets for specific institutions.  These are treated in the same way as other budgetary measures, i.e. institutions are compared with one another (league tables) and their past performance (looking for year-on-year improvement)  These are elements of control; resources follow the successful achievement of targets.

74. SAQ 10.5 What particular problems might be caused in a hospital by the incorporation of non-financial targets such as “Average patient waiting time” in an A & E Department as part of their budgetary considerations? Solution

75. SAQ 10.5– Solution (1) The problems are exactly the same as those outlined for financial targets:  Rigidity – managers may feel straitjacketed by the targets and manage purely to meet rather than exceed them; this means that ‘natural grass-roots development’ tends to be stifled. (e.g. new types of procedure which might ultimately lead (in the long run) to improved patient care will not be implemented, as in the short run this might result in failure to meet targets.) Fixation- There is a focus on the target at expense of other criteria.In the example given, it could lead to undifferentiated patient care (e.g. a patient with a cut finger becomes as important as road traffic accident victim)

76. SAQ 10.5– Solution (2)  Manipulation: The department is reorganised in such a way as to present figures which meet the target, but do not necessarily result in improvements. (e.g. All patients are met at the door by a doctor, and then asked to wait – this technically reduces the waiting time to zero, but does not improve the service) Exaggeration: Accounting procedures are put in place which locally redefine what the target means. (e.g. Average patient waiting time redefined as: the time before first treatment divided by the total number of separate visits by a doctor or nurse subsequently.)

77. Follow-up to Lecture 10 - Activities Reading  All of chapters 12 and 13 of M & A, except the details of material on variances pp pp 395-404. Activity.  Attempted the test material on budgets on the M & A website, sections 12 & 13. There will be no questions in the examination which ask you to calculate budgets, so any of these questions which require calculation (e.g. calculation of specific variances) can be omitted.  The seminar this week will focus purely on the examination.