高级管理会计学课件：lesson 5 budget systems design

1、1Budget systems design Lesson 52Introduction of lesson 5Explain how budgets relates to the strategic objectives and risks facing an organization. Learn how organizations set their performance targets.Study sales volume variances and mix and yield variances. Interpreting a customer profitability repo

2、rt and preparing an income-statement variance analysis.3Lesson 5 Topics outlineLinking budgets to strategic objectives and risks Types of budgetsSetting financial targetsSales-volume varianceMix-and-yield variances for substitutable inputs Customer profitability analysis4Topic 1: Linking budgets to

3、strategic objectives and risksLearning ObjectiveExplain how budgets relate to the strategic objectives and risks facing an organization. (Level 2)Required reading Textbook: Chapter 8, pages 306-309, up to “Target setting”Planning and Budgeting Planning: is the process of designing a desired future a

4、nd the effective ways of making it happen.Strategic planning (long-range planning): is a systematic and formalized process for purposely directing and controlling future operations towards desired objectives for periods extending beyond one year.Budgeting (short-term planning): focus on activities o

5、f an organization within a single year. It may be viewed as a short-term quantified plan of an organizations strategies. The budgeting model6Vision Strategic planAnnual budgetKeeping on track Control (vs. budget)Incentives (vs. budget)Culture: Contract, compliance and controlFixed performancecontrac

6、tsCharacteristics of a budgetIt is usually stated in monetary termsIt generally covers a period of one yearIt contains an element of management commitment, that is, the managers agree to accept the responsibility for attaining the budgeted objectivesThe budget is approved by an authority higher than

7、 the budgeterOnce approved, the budget can be changed only under specified conditionsPeriodically, actual financial performance is compared to budget and variances are analyzed and explainedBudgeting and management controlBudgeting involves setting targets that are commonly used as standards against

8、 which to evaluate performance results controlsPlanning and budgeting processes involve formal reviews of plans and include the actions that arefelt to be good for the organization to take action controlsPlanning and budgeting processes provide the needed information for decision making to thereleva

9、nt managers personnel controlsThe budget preparation processBudget DepartmentBudget CommitteeBusiness Managers1. Issuance of Guidelines2. Initial Budget Proposal3. Negotiation4. ApprovalTop-DownBottom-UpThe budgeting process takes about 4 months in most firmsParticipative Budget SystemA budget is pr

10、epared with the full cooperation andparticipation of managers at all levels. A participativebudget is also known as a self-imposed budget.Advantages of Participative Budget SystemLeads to managerial acceptance of , and commitment, to the budgetEnhances morale and motivation Integrates knowledge, vie

11、w points, and information in budget development among the various level of management Help develop managers budgetary skillsProvides an opportunity for managers of organizational units to coordinate with one anotherDisadvantages of Participative Budget SystemMore time required in budgeting processIn

12、put gathered from lower level employees who may not be informed or are inexperienced.May cause slack to be built into the budgetMay support empire buildingMay create dissatisfaction with the process if participation is negated by top management changes.The Purpose of BudgetingPlanningCoordinating an

13、d communicatingMonitoring progressEvaluating performanceFor example:Benefits of Budgetingrequires managers to planpromotes coordinationand communicationBenchmarking: helps managersevaluate performanceAnd motivates employees toachieve company goals16Topic 2: Types of budgetsLearning ObjectiveExplain

14、the various types of budgets, the approaches to developing them, and the advantages and disadvantages of budget control. (Level 2)No required reading Master BudgetBudget for the whole organizationOperating BudgetCapital Expenditures BudgetFinancial BudgetOperating BudgetSales budgetOperating expense

15、 budgetProduction budgetBudgeted income statementDirect materials budgetManufacturing overhead budgetDirect labor budget18Capital Expenditures and Financial BudgetsBudgeted income statementFinancial budgetsCapital expenditures budgetCash budgetBudgeted balance sheet19Budgeting or beyond budgetingTra

16、ditional budgetingintroduced in 1920sinefficient/ineffective resource allocation practiceBetter budgeting movementimprove traditional budgeting practices (Bourne, 2000)Beyond budgeting movementmanage without budgets (Hope and Fraser, 2000)Traditional budgetingTRADITIONAL BUDGETING IS BEING BY-PASSED

17、 BSC TQM IT ABC/M EVA BENCH- TARGET CHANGE MARKING COSTING MANAGEMENTBUDGETING_ Largely top-down Financially orientated Organizationally basedWeaknesses with traditional budgetingToo time consumingRushed processBudgets out-of-date before year beginsDoes not motivate you to set yourself ambitious tar

18、getsOut-of-touch with competitive environmentGaming the numbers too prevalentBudgets are rarely strategically focusedBetter budgeting practices A number of innovations in budgeting practice have been developed in recent years to overcome some of the problems with traditional budgetingZero-base budge

19、tingContinuous/rolling budgetsActivity based budgetingKaizen budgeting25 Kaizen budgeting Kaizen budgeting is a budgetary process that explicitly incorporates continuous improvement during the budget period. 26Kaizen costing Key points Kaizen costing keeps the idea of costs up front in the minds of

20、employees.It is not just a formula used when calculating costThe ideals of continuous improvement and cost reduction are valuable and will be zealously pursued in long-term.Factory Labor27 Activity-based budgetingActivity-based budgeting (ABB) focuses on the costs of activities that are used to prod

21、uce and sell products and services, rather than focusing on the functional department costs, as in traditional costing. ABB separates indirect overhead costs into separate homogeneous cost pools and uses cause-and-effect criteria to identify cost drivers for each cost pool. Activity Based Budgeting

22、StrengthsLinks budgets in with the overall strategy of the organizationIdentifies critical success factorsConcentrates on activities rather than individual cost centres allowing for the “big picture” to be seenCan improve the commitment of managers. WeaknessRequires resources and time to prepare.Bey

23、ond budgetingIs the improvement of budgeting enough?Fundamental problems with budgeting:- rapid pace of change - rushed process does not give adequate time to review discretionary costs- budget revision leads to loss of control- internal rather than external standardsCan we manage better without bud

24、gets?Recent survey findings about budgetingCompanies take 4 months to develop financial planBudgeting eats up 20-30% of senior executives time85% of management teams spend less than one hour a month discussing strategyCompanies could save 4m a year if they abandoned budgeting“Beyond Budgeting”?In Be

25、yond Budgeting Hope and Fraser argued that budgets:Add little valueAre used excessively in measuring performanceAre used as a method to communicate the values of the organization rather than as a means of financial controlAre too inwardly focusedAre a major barrier to changeAdaptive processesThe bey

26、ond budgeting modelStrategic objectivesAdaptive processesMake action planning continuous and inclusiveMake resources available as requiredCo-ordinate according to customer demandSet stretch goals based on relative standardsBase controls on effective governance and relative KPIsBase rewards on evalua

27、tion with hindsightHope and Fraser, 2003Twin peaks of beyond budgetingTraditional organisationsAdaptiveorganisationsAdaptive and Decentralised Organisations(1)(2)PerformanceDegree to which organisation is Adaptive and DecentralisedHope & Fraser, 2003“Beyond Budgeting”Some “principles”GoalsSet relati

28、ve goals for continuous improvement; not fixed performance contractsRewardsReward success based on relative performance; not on meeting fixed targetsPlanningMake planning a continuous and inclusive process; not a top-down annual eventCoordinationCoordinate interactions dynamically; not through annua

29、l planning cyclesResourcesMake resources available as needed; not through annual budget allocationsControlsBase controls on relative indicators and trends; not on variances against planApplicability in practice? Effectiveness? Problems?Beyond budgeting in practiceVery few companies have eliminated b

30、udgets altogethermost of those that have are Scandinavian companies including Svenska Handelsbanken(瑞典商业银行）, Borealis and SkandiaCompanies such as Shell, BP, AstraZeneca and the Ford Motor Company are beginning to move away from traditional budgeting and review processes37Topic 3: Setting financial

31、targetsLearning ObjectiveExplain how organizations set short-term and long-term financial targets and the decision-making. (Level 2)Required reading Textbook: Chapter 8, pages 309-318 Ethics readings handbook, unit C5: “Corporate greed versus the institute of management accountants ethics code”Types

32、 of financial performance targets1.Model-based (engineered) ,historical, or negotiated2.Internally / externally-derivedTarget costingBenchmarking3.Fixed / FlexibleShould managers be held accountable for achieving their plans regardless of the business conditions they face?Relative performance target

33、sBudget target difficultynonlinear relationship between target difficulty and motivationGoal DifficultyEasyImpossibleMotivation / PerformanceBudget target difficulty (continued)In theory (lab experiments):“Good targets” are about 2540% achievableTargetPerformanceProbabilityIn practice (field researc

34、h)Targets are about 8090% achievableTargetPerformanceProbabilityBudget target difficultyIneffective vs. Effective management teamsTargetPerformanceProbabilityBudget target difficultyLow vs. high uncertaintyTargetPerformanceProbabilityBudget target difficultyWhat is a “good” budget target?MotivationP

35、lanningCoordinationCost controlEvaluationPurpose of BudgetingConservativeBest guessOptimisticTarget DifficultyTarget should be after-the-fact assessment of what couldhave been accomplished, not any of the three choices listedChallenging but achievable targetTo minimize dysfunctional management actio

36、nsMyopic behavior, data manipulationTo increase managers commitment to budget targetsTo reduce the cost of organizational interventionsManagement-by-exceptionTo protect against the cost of optimistic revenue projectionsOver-commitment of resourcesTo create a “winning” atmosphere and positive attitud

37、eSpecialorderdecisionsProductmixdecisionsMakeor buydecisionsJointproductdecisionsProduct markets can change quickly due to competitor pricecuts, changing customer preferences, and introduction ofnew products by competitors.Managers must make short-run decisions, with a fixed setof resources, to reac

38、t to the changing market place. Decision makingFive-step decision making process1. Identify the problem and uncertainties.2.Obtain information 3. Make predictions about the future4. Make decisions by choosing among alternatives.5.Implement the decision, evaluate performance and learn.Decision framin

39、g places a given problem into a framework of variables to create boundaries on the nature of the problem.three principles of consistent framing: the irrelevance of increasing transformations the importance of local searches the need for component searchesDecision frameIrrelevance of increasing trans

40、formationsIn the context of maximizing profit, adding or subtracting a constant dollar amount is irrelevant since doing so will not change profit-maximizing quantities. incremental profit frame 增量收益法total profit frame 总收益法Importance of local searchesManagers must pre-screen decision alternatives.per

41、haps three or four optionsThis pre-screening will lead to optimal decisions as long as the benefits associated with the excluded actions, or opportunity costs, are not greater than the chosen solution. 51Need for Component searchesSome decision searches can be broken down into component searches.For

42、 example, the profit-maximization search can be broken down into revenue functions and cost functions. CVP graph53Maximum profit occurs where the vertical distance between the total revenue curve (marginal revenue) and the total cost curve (marginal cost) is the greatest (that is, at point T, the re

43、venue curve being above the cost curve). 54Economic functions of revenue and costActivityTotal CostEconomistsCurvilinear Cost FunctionT Maximum profit is reached when the vertical line between the curve and the x-axis is greatest.55Economic functions of revenue and costActivityTotal CostEconomistsCu

44、rvilinear Cost FunctionT Marginal cost / Marginal revenue the costs of producing additional units of goods and service and illustrated by the slope of the total cost line 56The problem of Decision modelsDecision models are designed to provide managers with tools to make decisions among different alt

45、ernatives, using decision criteria. The problem with most models is that they generally consider only one set of variables at a time and compute one output. To be accepted or rejected, the output must then be compared to some predetermined barrier or criteria. This does not echo how decisions are ma

46、de in reality.57The problem of Decision modelsBecause of the uncertainty that exists in business, this process is much more complex in the real world.Situational factors also differ between theoretical models and real-world applications.The time frame from decisions to actual implementation can also

47、 hinder the success of a proposal under consideration, as these factors also change over time.58Coping with uncertaintyMethods to cope with the impact of uncertainty in decision models:Sensitivity AnalysisProbabilities analysisuncertainty59Sensitivity AnalysisCVP Provides structure to answer a varie

48、ty of “what-if” scenarios“What” happens to profit “if”:Selling price changesVolume changesCost structure changesVariable cost per unit changesFixed cost changes60Probabilities analysisStep 1: Identify a choice criterionObjective that can be quantified.Step 2: identify the set of alternative actions

49、to be consideredStep 3: identify the set of events that can occurStep 4: Assign a probability to each event that can occur.Step 5: Identify the set of possible outcomes.the Expected value is the weighted average of the outcomes.61Topic 4: Sales-volume varianceLearning ObjectiveDetermine components o

50、f sales-volume variance. (Level 1)Required readingTextbook: Chapter 12, pages 520-513Chapter 14, pages 540-546, from “Sales Variances” up to “ Decision Points”62Sales VariancesStatic-Budget VarianceFlexible-Budget VarianceSales-volume VarianceSales-Mix VarianceSales-Quantity VarianceMarket-Share Var

51、ianceMarket-Size Variance(Level 1)(Level 2)(Level 3)(Level 4)Overview of “Sales” variancesActual Flexible Static Budget Budget | Flex. V.| Sales-volume V.| | Sales-Mix V.| Sales-Quant.V.| |- Mkt.-share V. -|- Mkt.-size V.-|Actual Mkt. sizex Actual Mkt. sharex Actual sales mixx Actual CM /unitActual

52、Mkt. sizex Actual Mkt. sharex Actual sales mixx Budget CM /unitActual Mkt. sizex Actual Mkt. sharex Budget sales mixx Budget CM /unitActual Mkt. sizex Budget Mkt. sharex Budget sales mixx Budget CM /unitBudget Mkt. sizex Budget Mkt. sharex Budget sales mixx Budget CM /unit64 Sales-volume variancesTh

53、e sales-volume variance is the difference between a flexible-budget amount and the corresponding static-budget amount. is calculated by subtracting static-budget units sold from the actual number of units sold multiplied by the budgeted unit contribution margin65Sales-volume variances: ExampleBudget

54、ed data for the year for Electra Co.:Static-budget contribution margin variance = Actual results Static-budget amount= 6,617,600 7,600,000= - 982,400 U66Sales-volume variances: ExampleFlexible Budget variance- 451,200 UStatic-budget contribution margin variance - 982,400 UActualLamps: 357,20012= 4,2

55、86,400Phones: 582,8004= 2,331,200 6,617,600Static budgetLamps: 400,00010= 4,000,000Phones: 600,0006= 3,600,000 7,600,000Flexible budgetLamps: 357,20010= 3,572,000Phones: 582,8006= 3,496,800 7,068,800- 982,400 USales-volume variances - 531,200 U67Sales-volume variances: ExampleFlexible Budget varianc

56、e - 451,200 UStatic-budget contribution margin variance 982,400 UActual 6,617,600Static budget 7,600,000Flexible budget940,0000.3810= 3,572,000940,0000.626= 3,496,800 7,068,800Sales-volume variances - 531,200 U= Actual sales quantity in units Actual CM per unit= Actual sales quantity in units Budget

57、ed CM per unit= Budgeted sales quantity in units Budgeted CM per unit68Sales-volume variances: ExampleFlexible Budget variance Sales-volume variances = Actual Sales quantity in units (Actual CM per unitBudgeted CM per unit)=(Actual sales quantity in units Budgeted quantity sales in units ) Budgeted

58、CM per unitLamps = 357,200(12 10) = 714,400 FPhones = 582,200 (4 6) = - 1,165,600 UFlexible Budget variance- 451,200 U Lamps = (357,200 400,000)10 = - 428,000 UPhones = (582,200 600,000)6 = - 103,200 USales-volume variance - 531,200 U 69 Sales-volume variancesA greater understanding of the sales-vol

59、ume variance can be obtained when it is broken down into the sales-mix variance and the sales-quantity variance. 70Sales-volume variances: ExampleSales-mix variance- 75,200 USales-volue contribution margin variance - 531,200 UFlexible budgetLamps: 940,0000.3810= 3,572,000Phones: 940,0000.626= 3,496,

60、800 7,068,800Static budgetLamps: 1,000,0000.410= 4,000,000Phones: 1,000,0000.66= 3,600,000 7,600,000Budget Lamps: 940,0000.410= 3,760,000Phones: 940,0000.66= 3,384,000 7,144,000- 531,200 USales-quantity variances - 560,000 U71Sales-volume variances: ExampleSales-mix variance- 75,200 USales-volume co