7/28/2019 p2_fmarticle_oct2012

1/3

Study notes 39

Notes

Paper P3

Performance Strategy p44

Paper F3Financial Strategy p47

S t u d y

Over the many years I have delivered

CIMA courses, Ive noticed that

ew candidates seem to examine the

syllabus in detail. Students might

be aware o the broad headings but

not o all the items under them.

Unortunately, this will reduce their chances o

success. They will tend to prepare a set o generic

answers that could be roughly adapted to any

question in one particular area o the syllabus. Such

answers rarely gain high marks.

This article will ocus on one o the main parts

o the P2 syllabus topic C, Budgeting and

management control and examine some o the

important components relating to budgeting.

I wont cover every item in this area, nor will Idiscuss generating a budget or the characteristics

o the various types o budgets, because the study

text does that. What I will do is describe the angles

rom which it may be examined so that we can see

what the examiner is actually testing.

Management accounting is built on the three

pillars o planning, control and decision-making.

Its essential to distinguish among the three

dierent types o planning: strategic, budgetary

Paper P2

Management

Performance

By Norwood Whittle, FCMA, CGMA

CIMA course leader at the University of Northampton

and lead marker for P2

Too many students go into the exam without a frm

grasp o the syllabus and how topics will be examined.

This leads them to give unocused answers when

they need to show their knowledge o specifc areas

In association with

and operational. These three are related, the main

dierence being the length o time they cover.

Strategic planning ocuses on achieving the

organisations long-term objectives; budgetary

planning covers the short to medium term; and

operational planning reers to short-term or day-

to-day processes.Candidates must be able to:

l Describe the three types o planning.l Distinguish among them.l Explain how a budget is carried out within the

ramework o the strategic plan.

The two most important control tools are

standard costing and variances, and budgets. This

key area o the syllabus will be examined regularly

and you must be able to apply your knowledge to

questions about specic aspects o budgets and

budgeting control, instead o writing generic

answers. You must also be able to suggest the most

appropriate budget technique or the scenario

given, so youll need to be amiliar with the main

eatures o the dierent types o budgets.

Remember that the syllabuses under the

Perormance pillar are progressive, which means

that aspects covered in both the P1 and C01 papers

can be examined in the P2 paper.

When preparing or the P2 exam, review these

two syllabuses and conrm your understanding

o how to:l Form a budget committee.l Identiy any principal budgeting actor.l Review and co-ordinate action o the budget.l Agree the budget period.l

Prepare unctional budgets.l Prepare a master budget.

Lets consider some o the main items in this

part o the syllabus.

Budget v budgetary controlCandidates need to be able to do the ollowing:l Dene a budget.lDene budgetary control and describe the steps

o producing a budget. Judging rom many

Students mightbe aware o the

syllabuss broad

headings, but noto all the items

under them

7/28/2019 p2_fmarticle_oct2012

2/3

answers in past exams, its clear that many candi-

dates dont appreciate that budgetary control is

the process that an organisation completes in pre-

paring a budget. Budgetary control is the practice

o systematically comparing the results actually

achieved with those budgeted or.l Understand the principles o standard costing

and variance analysis, and how this technique

dovetails with the preparation o a budget.l Relate the theory to any scenario.

The theory o systemsYou need to be aware o the basic control system

theory and how this applies in budgetary control.Candidates need to be able to:l Describe how a system is a set o related parts

co-ordinated to accomplish a set o goals.lDescribe the key characteristics and components

o a system inputs, process, outputs, environment

and boundary and relate these to any scenario.

Feedback v feed-forward control systemsMost budgetary control systems work on the

eedback principle. Inormation on actual results

are compared against control data in this case,

the budget and any variances rom the control

data will normally prompt immediate action

(eedback) to bring uture results back in line with

the budget. Feedback control involves acting ater

the event, but in some situations it may be more

appropriate to adopt a eed-orward approach.

This is where there is monitoring at an early stage

o a process, which may show that an adjustment

should be made at a later stage beore the nal

output. Feed-orward control loops react to

orthcoming dangers.

Candidates need to be able to:l Explain the concepts o eedback and eed-

orward control systems.l Compare and contrast the two systems.l

Explain the dierence between negative andpositive eedback.lDescribe how a eedback control loop might work

in the context o a budgetary control system.l Describe the components o the control system

(sensor, comparator and eector).

Top-down v bottom-up (participative)You need to be able to discuss the advantages and

disadvantages o the top-down and bottom-up

approaches, appreciating in particular that the

bottom-up approach allows less senior managers

to get more involved in setting budgets. It also

allows the business to take ull advantage o its

managers local knowledge and expertise. The

main drawbacks o this approach are that it can

be time-consuming and lead to the introduction

o slack to allow the budget to be achieved easily.

Candidates need to be able to:lUnderstand the circumstances under which each

technique is appropriate.l Discuss the advantages and disadvantages o

each technique.

l Appreciate the behavioural implications oadopting either approach.

Incremental v zero-based budgetsIts quite common, particularly in the public sector,

to x a budget on the basis o what happened the

year beore, perhaps with some adjustments or

changes that are nearly certain to occur e.g. an

agreed pay rise. This is known as incremental

budgeting and its oten used or unctions such

as R&D, advertising and training. Budgets relating

to this type o expenditure are known as dis-

cretionary budgets.

In contrast, zero-based budgets (ZBBs) are based

on the principle that all expenditure must be

justied. Hence, it is not assumed that an activity

will automatically be nanced in the orthcoming

year just because it was nanced the year beore.

Candidates need to be able to:l Describe incremental budgeting.l Understand the nature o discretionary costs

and discretionary budgets.l Understand the circumstances under which an

incremental budget is more appropriate and those

under which a ZBB is more appropriate.lDescribe the main characteristics o a ZBB e.g.

decision packages.l

Discuss the pros and cons o ZBBs.

Rolling (continual) budgetsMost budgets are prepared periodically, usually

or the next nancial year. This is appropriate in

most cases. But when its hard to predict events

accurately or the next 12 months owing to a high

level o infation, say it may be more appropriate

to adopt a rolling approach in which a detailed

budget is produced or the rst three months

Study notes 41

Performance Management

Zero-based

budgets arebased on the

principle that

all expendituremust be

justied

Paper P2

7/28/2019 p2_fmarticle_oct2012

3/3

42

Paper P2Performance Management

and a less detailed macro budget is produced to

cover the subsequent nine months.

Candidates need to be able to:l Describe the main characteristic o a rolling

budget, especially any disadvantages e.g. the

act that they are extremely time-consuming.l Understand the circumstances under which a

rolling budget approach would be benecial.l Discuss whether the traditional budget or the

rolling budget is likely to be more benecial or

planning purposes.

Fixed v fexible budgets

When managers compare actual results againstthe budget, the comparison needs to be meaningul

otherwise, it wont be valid. For many businesses,

revenues and costs in a period are airly predictable

and the budget could be prepared or one level

o activity. But this wouldnt be suitable or

enterprises where the level o activity could vary

widely e.g. ice cream sales in a cold, wet summer.

In such circumstances a fexible budget would be

more appropriate and a budget would be prepared

or dierent levels o activity.

Candidates need to be able to:l Describe the main characteristics o ixed

budgets and fexible budgets.lUnderstand the circumstances that would avour

one approach over the other.l Generate a fexible budget having been given

the necessary data e.g. costs that are xed and

those that vary with output.l Apply the high-low technique to establish the

xed cost and variable cost per unit o output.l Present the lexible budget so that a non-

nancial person can understand it.

Activity-based budgeting (ABB)Candidates need to appreciate that ABB extends

the principles o activity-based costing. With the

ABB approach, budgets are prepared according toactivity rather than unction, as is normally the

case with a traditional budget. ABB starts with

output (the sales budget) and then works through

to nd the activity costs, whereas activity-based

costing is the other way around. It starts by

establishing activity costs and then attaches these

costs to units o output. I an activity-based budget

is put in place, it should give a better understanding

o the eect on budget costs o changes in the

usage o the cost driver because o how cost

drivers, activities and costs are explicitly related.

Candidates need to be able to:l Describe the main characteristics o activity-

based budgets.l Discuss how activity-based budgets compare

with traditional budgets.lDescribe how control should be improved in an

ABB environment.l Discuss the advantages o ABB.

Beyond budgetingIt is important or candidates to be able to question

the continued use o traditional budgets. Most

businesses ully accept the need or planning well

ahead, but its oten suggested that the budget

systems adopted should refect a broader, more

intelligent approach. The beyond budgeting model

promotes a more decentralised, participative

approach to managing a business and is based on

the use o stretch targets that can be adapted.

Candidates need to be able to:l Describe the main principles associated with

beyond budgeting.lCompare beyond budgeting with the traditional

approach, particularly highlighting the disad-

vantages o the latter.l Explain how beyond budgeting allows greater

adaptability to changing business conditions.lExplain how beyond budgeting can increase moti-

vation among sta i.e. the behavioural aspect.

Study notes

Preparing the

budget or one

level o activitywouldnt be

suitable or

enterprises

where the levelo activity could

vary widely

e.g. ice creamsales in a cold,

wet summer

Further reading CIMA Ofcial Study Text P2 Perormance Management (2012-13 edition), CIMA Publishing, 2012.

GettyImages