P2 Chapter 9

• Fixed budget


  A budget produced for a single level of activity
• Flexible budget


  A budget designed to change as volume of activity changes, by recognising cost behaviour patterns
• A fixed budget will remain the same no matter the volume of sales or production
• A flexible budget should represent what the costs and revenues were expected to be at different activity levels
• Fixed budget


  Not particularly useful for control, predominantly used in the planning stage of budget preparation, often referred to as the original budget
• Flexible budget


  Particularly useful for control as the original (fixed) budget can be flexed to show the costs and revenues for the actual level of activity
• Controllable and uncontrollable costs have been covered in responsibility centres notes
• Planning variances


  More helpful in volatile environment, helps signify the importance of planning in setting standards and points out to planning deficiencies
• Operational variances


  Provide good information about current efficiency, make standard costing more accurate and acceptable, hence increasing motivation
• Pros of planning and operational variances

  • More helpful in volatile environment
  • Operational variances provide good information about current efficiency
  • Operational variances make standard costing more accurate and acceptable, hence increasing motivation
  • Helps signify the importance of planning in setting standards and points out to planning deficiencies
• Cons of planning and operational variances

  • Subjective
  • Takes a lot of efforts, coming up with up to date standards
  • Temptation to put majority of negative variance towards planning variance
  • May cause conflict between planning and operating staff
• Non-financial performance indicators


  Forward looking, information has to be collected from internal and external sources, have to be looked at with context to prevailing conditions within and outside the organisation
• Shortcomings of financial indicators

  • Historical
  • Not forward looking
  • Vulnerable to manipulation through choice of accounting policy
  • Don't relate to strategic planning of the company and may cause short-termism
• Problems in reports for not-for-profit organisations


  • Problem of identifying and measuring objectives
  • Profit maximisation is not an objective
  • Objectives vary with the kind of organisation
  • Problem of identifying and measuring outputs
  • Argument of social benefits v/s social costs and financial benefits v/s financial costs
  • Output not measurable in objective units or financially
• 3 Es concept


  Economy (input measure), Efficiency (output measure), Effectiveness (linked with objective)
• Benchmarking


  The establishment, through data gathering, of targets and comparators, that permit relative levels of performance (and particular areas of underperformance) to be identified. The adoption of identified best practices should improve performance
• Reasons for benchmarking


  • Get an alarm clock about need for change
  • Learning from others
  • Gaining competitive edge – private sector
  • Improving services – public sector
• Types of benchmarking


  • Internal benchmarking (benchmarking a department within the organisation, objective isn't to defeat competition but learn)
  • Competitive benchmarking (companies in same industry come to collaborative benchmarking process, managed by 3rd party, they submit their data for collective learning)
  • Functional benchmarking (comparison made with same function but different organisation that are not directly competitors)
  • Strategic benchmarking
• Measures for balanced scorecard - Financial perspective


  • Survival – cash flow, gearing
  • Success – Routinely sales growth/ income
  • Prosperity – market share, ROI
• Measures for balanced scorecard - Customer perspective

  • Customer profitability
  • Customer retention
  • Customer satisfaction
  • Customer acquisition
  • Market share
  • % sales from new products
  • % of non-time deliveries
  • Preferred supplier status
  • Lead times
  • No. of customer complaints

  
• Measures for balanced scorecard - Internal business processes perspective


  • % sales from new products
  • % sales from proprietary product
  • New product introduction – action v/s plan
  • Manufacturing process capabilities
  • Time to develop next generation of products
  • Cycle time, unit cost, efficiency

  
• Measures for balanced scorecard - Learning and growth perspective

  • Employee satisfaction
  • Employee retention
  • Employee productivity
  • Time to market
  • % of products giving 80% of sales
• Perspectives of balanced scorecard

  • Shareholder centric
  • Business process centric
  • Employee centric
  • Customer centric