Management control systems

Question IM 16.1 Intermediate

You have applied for the position of assistant accountant in a company manufacturing a range of products with a sales turnover of 12 million per annum and employing approximately 300 employees. As part of the selection process you are asked to spend half an hour preparing a report, to be addressed to the managing director, on the topic of cost control. You are required to write the report which should deal with what is meant by cost control, its purpose and the techniques which you believe would be useful within this particular company. (20 marks) CIMA Foundation Cost Accounting 1 Outline the main features of a responsibility accounting system. (6 marks) ACCA Level 2 Management Accounting Explain the meaning of each of the undernoted terms, comment on their likely impact on cash budgeting and profit planning and suggest ways in which any adverse effects of each may be reduced. (a) Budgetary slack. (7 marks) (b) Incremental budgets. (7 marks) (c) Fixed budgets. (6 marks) (Total 20 marks) ACCA Level 2 Cost and Management Accounting II (a) Discuss the use of the following as aids to each of planning and control: (i) rolling budgets (ii) flexible budgets (iii) planning and operational variances. (9 marks) (b) Discuss the extent to which the incidence of budgetary slack is likely to be affected by the use of each of the techniques listed in (a). (6 marks) (Total 15 marks) ACCA Paper 9 Information for Control and Decision Making In the context of budgetary control, certain costs are not amenable to the use of flexible budgets. These include some costs which are often called discretionary (or programmed). You are required to explain: (a) the nature of discretionary (or programmed) costs and give two examples; (b) how the treatment of these costs differs from that of other types of cost in the process of preparing and using budgets for control purposes. (20 marks) CIMA P3 Management Accounting

Question IM 16.2 Intermediate Question IM 16.3 Intermediate

Question IM 16.4 Advanced

Question IM 16.5 Advanced

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Textbooks on accounting often describe management information and financial control systems as if they work in exactly the same way as machine control systems. Many accountants appear to assume that they do work in this way. The problem is that business operations do not function like machines. Unless a financial control system is very well designed and managed, then it can easily distort the functioning of a business operation. One comment on the design and use of financial control systems Requirements Having regard to this comment, (a) explain the concepts of management information system design, and the role that such systems play in the financial control of business operations; explain the role that performance evaluation plays in a management information system; compare and contrast output controls and input controls in the context of a management information system; (11 marks) (b) explain the manner in which management information systems can distort the functioning of the business operations they are meant to serve; he action that might be taken by the chartered management accountant in order to avoid such distortion; (9 marks) (c) explain how the use of PCs, spreadsheets and databases contributes to the costeffectiveness of management information systems. (5 marks) (Total 25 marks) CIMA Stage 3 Management Accounting Applications (a) In the context of budgeting, provide definitions for four of the following terms: aspiration level; budgetary slack; feedback; zero-base budgeting; responsibility accounting. (8 marks) (b) Discuss the motivational implications of the level of efficiency assumed in establishing a budget. (9 marks) (Total 17 marks) ACCA Level 2 Management Accounting In the context of budgeting, describe the meaning of and write notes on four of the following terms: Feedback control; Feedforward control; Budgetary slack; Aspiration level; Control limits; Noise. (17 marks) ACCA Level 2 Management Accounting Budgeting is too often looked upon from a purely mechanistic viewpoint. The human factors in budgeting are more important than the accounting techniques. The success of a budgetary system depends upon its acceptance by the company members who are affected by the budgets. Discuss the validity of the above statement from the viewpoint of both the planning and the control aspects of budgeting. In the course of your discussion present at least one practical illustration to support your conclusions. (20 marks) ACCA P2 Management Accounting

Question IM 16.6 Advanced

Question IM 16.7 Advanced

Question IM 16.8 Advanced

Question IM 16.9 Advanced

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Question IM 16.10 Advanced

The major reason for introducing budgetary control and standard costing systems is to influence human behaviour and to motivate the managers to achieve the goals of the organization. However, the accounting literature provides many illustrations of accounting control systems that fail to give sufficient attention to influencing human behaviour towards the achievement of organization goals. You are required: (a) To identify and discuss four situations where accounting control systems might not motivate desirable behaviour. (b) To briefly discuss the improvements you would suggest in order to ensure that some of the dysfunctional behavioural consequences of accounting control systems are avoided.

Question IM 16.11 Advanced

The final impact which any accounting system has on managerial and employee behaviour is dependent not only upon its design and technical characteristics but also in the precise manner in which the resulting information is used (A. Hopwood, Accounting and Human Behaviour). Discuss this statement in relation to budgeting and standard costing. Motivation is the over-riding consideration that should influence management in formulating and using performance measures, and in designing management control systems. Discuss this statement in relation to the design and implementation of budgetary control systems. (a) Discuss the behavioural arguments for and against involving those members of management who are responsible for the implementation of the budget in the annual budget setting process. (10 marks) (b) Explain how the methods by which annual budgets are formulated might help to overcome behavioural factors likely to limit the efficiency and effectiveness of the budget. (7 marks) (Total 17 marks) (a) An extensive literature on the behavioural aspects of budgeting discusses the propensity of managers to create budgetary slack. You are required to explain three ways in which managers may attempt to create budgetary slack, and how senior managers can identify these attempts to distort the budgetary system. (6 marks) (b) Managerial behaviour can be quite different from that discussed in (a). You are required to explain circumstances in which managers may be motivated to set themselves very high, possibly unachievable budgets. (6 marks) (c) Sections (a) and (b) above are examples of differing managerial behaviour in disparate situations. There are theories which attempt to explain the consequences for the design of management accounting systems of disparate situations, one of which is contingency theory. You are required to explain the contingency theory of management accounting the effects of environmental uncertainty on the choice of managerial control systems and on information systems for managerial control. (13 marks) (Total 25 marks) CIMA Stage 4 Management Accounting Control and Audit

Question IM 16.12 Advanced

Question IM 16.13 Advanced

Question IM 16.14 Advanced

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An article in Management Accounting concluded that there will always be some budgetary padding in any organisation. Requirements: (a) As Management Accountant, write a report to your Finance Director, explaining what steps can be taken by you, and by senior management when approving budgets, to minimise budgetary slack. (8 marks) (b) The Finance Director, having read the report referred to in part (a), discussed the problem with the Managing Director and suggested that appropriate action be taken to reduce budgetary slack. The Managing Director expressed doubts, stating that in his opinion removing all budget padding could cause considerable problems. Requirement: Explain the arguments that can be advanced for accepting some budgetary slack, and the advantages of this to the manager being appraised and to the organisation. Discuss whether the budget review and approval process should permit managers to build in some budgetary slack. (12 marks) (Total 20 marks) CIMA Stage 4 Management Accounting Control Systems (a) The following report has been prepared, relating to one product for March. This has been sent to the appropriate product manager as part of PDC Limiteds monitoring procedures. Monthly variance report March 1 Actual Production volume (units) Sales volume (units) Sales revenue () Direct material (kg) Direct material () Direct labour (hours) Direct labour () Contribution () 9 905 9 500 27 700 9 800 9 600 2 500 8 500 9 600 Budget 10 000 10 000 30 000 10 000 10 000 2 400 8 400 11 600 Variance 95 A 500 A 2300 A 200 F 400 F 100 A 100 A 2000 A % 0.95 A 5.00 A 7.67 A 2.00 F 4.00 F 4.17 A 1.19 A 17.24 A

Question IM 16.15 Advanced

Question IM 16.16 Intermediate: Criticism and redrafting of a performance report

The product manager has complained that the report ignores the principle of flexible budgeting and is unfair. Required: Prepare a report addressed to the management team which comments critically on the monthly variance report. Include as an appendix to your report the layout of a revised monthly variance report which will be more useful to the product manager. Include row and column headings, but do not calculate the contents of the report. (15 marks) (b) Explain the differences between budgetary control and standard costing/variance analysis. In what circumstances would an organization find it beneficial to operate both of these cost control systems? (5 marks) (Total 20 marks) CIMA Operational Cost Accounting Stage 2

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Question IM 16.17 Intermediate: Preparation of flexible budgets and an explanation of variances

You have been provided with the following operating statement, which represents an attempt to compare the actual performance for the quarter which has just ended with the budget: Budget Actual Variance Number of units sold (000s) Sales Cost of sales (all variable) Materials Labour Overheads Fixed labour cost Selling and distribution costs: Fixed Variable Administration costs: Fixed Variable Net profit 640 000 1024 168 240 032 440 100 72 144 184 048 548 036 720 000 1071 144 288 336 468 94 83 153 176 054 560 043 80 000 47

(28) (28) 6 (11) (9) 8 h(6) (12) 7

Required: (a) Using a flexible budgeting approach, re-draft the operating statement so as to provide a more realistic indication of the variances and comment briefly on the possible reasons (other than inflation) why they have occurred. (12 marks) (b) Explain why the original operating statement was of little use to management. (2 marks) (c) Discuss the problems associated with the forecasting of figures which are to be used in flexible budgeting. (6 marks) (Total 20 marks) ACCA Paper 8 Managerial Finance

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Data Jim Smith has recently been appointed as the Head Teacher of Mayfield School in Midshire. The age of the pupils ranges from 11 years to 18 years. For many years, Midshire County Council was responsible for preparing and reporting on the school budget. From June, however, these responsibilities passed to the Head Teacher of Mayfield School. You have recently accepted a part-time appointment as the accountant to Mayfield School, although your previous accounting experience has been gained in commercial organisations. Jim Smith is hoping that you will be able to apply that experience to improving the financial reporting procedures at Mayfield School. The last budget statement prepared by Midshire County Council is reproduced below. It covers the ten months to the end of May and all figures refer to cash payments made. Midshire County Council Mayfield School Statement of school expenditure against budget: 10 months ending May Expenditure Budget to date to date Teachers full-time 1 680 250 Teachers part-time 35 238 Other employee expenses 5 792 Administrative staff 69 137 Caretaker and cleaning 49 267 Resources (books, etc.) 120 673 Repairs and maintenance 458 Lighting and heating 59 720 Rates 23 826 Fixed assets: furniture and equipment 84 721 Stationery, postage and phone 1 945 Miscellaneous expenses 000 9 450 Total 2 140 477 1 682 500 34 600 15 000 68 450 57 205 100 000 0 66 720 19 855 100 000 0 000 6 750 2 151 080 Under/ over spend Total budget for year

Question IM 16.18 Intermediate: Responsibility centre performance reports

2 250 Cr 2 019 000 0 638 41 520 9 208 Cr 18 000 0 687 82 140 7 938 Cr 68 646 20 673 120 000 0 458 0 7 000 Cr 80 064 3 971 23 826 15 279 Cr 1 945 02 700 10 603 Cr 120 000 0 000 8 100 2 581 296

Task 1 Write a memo to Jim Smith. Your memo should: (a) identify four weaknesses of the existing statement as a management report; (b) include an improved outline statement format showing revised column headings and a more meaningful classification of costs which will help Jim Smith to manage his school effectively (figures are not required); (c) give two advantages of your proposed format over the existing format. Data The income of Mayfield School is based on the number of pupils at the school. Jim Smith provides you with the following breakdown of student numbers. Mayfield School: Student numbers as at 31 May School year 1 2 3 4 5 6 7 Total number of students
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Age range 1112 1213 1314 1415 1516 1617 1718

Current number of pupils 300 350 325 360 380 240 0220 2175
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Jim also provides you with the following information relating to existing pupils: pupils move up one school-year at the end of July; for those pupils entering year 6, there is an option to leave the school. As a result only 80% of the current school-year 5 pupils go on to enter school-year 6; of those currently in school-year 6 only 95% continue into school-year 7; pupils currently in school-year 7 leave to go on to higher education or employment; the annual income per pupil is 1200 in years 1 to 5 and 1500 in years 6 to 7. The new year 1 pupils come from the final year at four junior schools. Not all pupils, however, elect to go to Mayfield School. Jim has investigated this matter and derived accurate estimates of the proportion of final year pupils at each of the four junior schools who go on to attend Mayfield School. The number of pupils in the final year at each of the four junior schools is given below along with Jims estimate of the proportion likely to choose Mayfield School. Junior School Ranmoor Hallamshire Broomhill Endcliffe Number in final year at 31 May 60 120 140 80 Proportion choosing Mayfield School 0.9 0.8 0.9 0.5

Task 2 (a) Forecast the number of pupils and the income of Mayfield School for the next year from August to July (b) Assuming expenditure next year is 5% more than the current annual budgeted expenditure, calculate the budgeted surplus or deficit of Mayfield School for next year. AAT Technicians Stage

Question IM 16.19 Advanced: Design of a management control system

Maxcafe Ltd sold its own brand of coffee throughout the UK. Sales policies, purchasing and the direction of the company was handled from head office in London. The company operated three roasting plants in Glasgow, Hull and Bristol. Each plant had profit and loss responsibility and the plant manager was paid a bonus on the basis of a percentage on gross margin. Monthly operating statements were prepared for each plant by head office and the following statement is a monthly report for the Glasgow plant: Operating statement Glasgow plant April () Net sales Less: Cost of sales Special coffee at contract cost Roasting and grinding: Labour Fuel Manufacturing expenses Packaging: Container Packing carton Labour Manufacturing expenses Total manufacturing cost Gross margin on sales 1 489 240 747 320 76 440 49 560 067 240 193 240 169 240 18 280 24 520 050 880

262 920 1 203 480 0285 760

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Each month the plant manager was given a production schedule for the current month and a tentative schedule for the next month. Credit collection and payment was done by Head Office. The procurement of special coffee for roasting operations was also handled by the purchasing department at Head Office. The objective of the purchasing department was to ensure that any one of forty grades of special coffee was available for the roasting plants. Based on estimated sales budgets, purchase commitments were made that would provide for delivery in 3 to 15 months from the date that contracts for purchases were made. While it was possible to purchase from local brokers for immediate delivery, such purchases were more costly than purchases made for delivery in the country of origin and hence these spot purchases were kept to a minimum. A most important factor was the market know-how of the purchasing department, who must judge whether the market trend was up or down and make commitments accordingly. The result was that the purchasing department was buying a range of coffees for advance delivery at special dates. At the time of actual delivery, the sales of the companys coffee might not be going as anticipated when the purchase commitment was made. The difference between actual deliveries and current requirements was handled through either spot sales of surplus special grades or spot purchases when actual sales demand of the completed coffee brands was greater than the estimated sales. In accounting for coffee purchases a separate record was maintained for each purchase contract. This record was charged with coffee purchased and import and transport expenses, with the result that a net cost per bag was developed for each purchase. The established policy was to treat each contract on an individual basis. When special coffee was delivered to a plant, a charge was made for the cost represented by the contracts which covered that particular delivery of coffee, with no element of profit or loss. When special coffee was sold to outsiders, the sales were likewise costed on a specific contract basis with a resulting profit or loss on these transactions. For the past several years there has been some dissatisfaction on the part of plant managers with the method of computing gross margins subject to bonuses. This had finally led to a request from the managing director to the accountant to study the whole method of reporting on results of plant operations and the purchasing operation. Required: (a) An explanation to the managing director indicating any weaknesses of the current control system, and (b) an explanation of what changes you consider should be made in the present reporting and control system.

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Question IM 16.20 Advanced: Comments on an existing performance measurement and bonus system and recommendations for improvement

1. You are the group management accountant of a large divisionalised group. There has been extensive board discussion of the existing system of rewarding Divisional General Managers with substantial bonuses based on the comparison of the divisional profit with budget. The scheme is simple: the divisional profit (PBIT) is compared with the budget for the year. If budget is not achieved no bonus is paid. If budget is achieved a bonus of 20% of salary is earned. If twice budgeted profit is achieved, a bonus of 100% of salary is paid, which is the upper limit of the bonus scheme. Intermediate achievements are calculated pro rata. The Finance Director has been asked to prepare a number of reports on the issues involved, and has asked you to prepare some of these. He has decided to use the results for Division X as an example on which the various discussions could be based. A schedule of summary available data is given below. Division X Summary of management accounting data Strategic plan 2001 Prepared Aug 2000 Sales of units by Division X Sales Marginal costs Fixed factory cost Product development Marketing PBIT 35 000 28 000 14 350 6 500 2 000 3 500 1 650 Budget 2001 Prepared Oct 2000 36 000 28 800 15 300 6 800 2 000 3 200 1 500 Latest estimate 2001 Prepared April 2001 35 800 28 100 14 900 7 200 1 400 2 600 2 000

Division X manufactures and sells branded consumer durables in competitive markets. High expenditure is required on product development and advertising, as the maintenance of market share depends on a flow of well-promoted new models. Reliable statistics on market size are available annually. Based on the market size for 2000, where stronger than anticipated growth had occurred, a revised market estimate of 165 000 units for 2001 is agreed by group and divisional staff in May 2001. This is a significant increase on the estimate of 150 000 units made in May 2000 and used since. The Divisional General Manager has commented that action now, almost half way through the year, is unlikely to produce significant results during this year. However, had he known last year, at the time of producing the budget, that the market was growing faster, he could have taken the necessary action to maintain the strategic plan market share. The actions would have been cutting prices by 10 per unit below the price at present charged and used in the latest estimate for 2001, increasing marketing expenditure by 300 000 compared with the strategic plan. The Group Managing Director, commenting on the same data, said that the Divisional General Manager could have maintained both strategic plan market share and selling prices by an alternative approach. The approach, he thought, should have been maintaining expenditure on product development and marketing at 20% of sales over the years, spending his time controlling production costs instead of worrying about annual bonuses.

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You are required: (a) to analyse and comment on the results of Division X, making appropriate comparisons with Budget, with Plan and with new available data. Present the results in such a form that the Board can easily understand the problems involved; (17 marks) (b) to comment on the advantages and problems of the existing bonus system for the Divisional General Manager and the way in which the present bonus scheme may motivate the Divisional General Manager; (8 marks) (c) to make specific proposals, showing calculations if appropriate, for an alternative bonus scheme, reflecting your analysis in (a). (8 marks) A non-executive director has commented that he can understand the case for linking executive directors rewards to group results. He is not convinced that this should be extended to divisional managers, and certainly not to senior managers below this level in divisions and head office. (d) Explain and discuss the case for extending bonus schemes widely throughout the organisation. (7 marks) (Total 40 marks) CIMA Stage 4 Management Accounting Control and Audit A new private hospital of 100 beds was opened to receive patients on 2 January though many senior staff members including the supervisor of the laundry department had been in situ for some time previously. The first three months were expected to be a settling-in period; the hospital facilities being used to full capacity only in the second and subsequent quarters. In May the supervisor of the laundry department received her first quarterly performance report from the hospital administrator, together with an explanatory memorandum. Copies of both documents are set out below. The supervisor had never seen the original budget, nor had she been informed that there would be a quarterly performance report. She knew she was responsible for her department and had made every endeavour to run it as efficiently as possible. It had been made clear to her that there would be a slow build up in the number of patients accepted by the hospital and so she would need only 3 members of staff, but she had had to take on a fourth during the quarter due to the extra work. This extra hiring had been anticipated for May, not late February. Rockingham Private Patients Hospital Ltd MEMORANDUM To: From: All Department Heads/Supervisors Hospital Administrator 30 April

Question IM 16.21 Advanced: Budget use and performance reporting

Attached is the Quarterly Performance Report for your department. The hospital has adopted a responsibility accounting system so you will be receiving one of these reports quarterly. Responsibility accounting means that you are accountable for ensuring that the expenses of running your department are kept in line with the budget. Each report compares the actual expenses of running your department for the quarter with our budget for the same period. The difference between the actual and forecast will be highlighted so that you can identify the important variations from budget and take corrective action to get back on budget. Any variation in excess of 5% from budget should be investigated and an explanatory memo sent to me giving reasons for the variations and the proposed corrective actions.

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Performance report laundry department 3 months to 31 March Variation (Over) Under (1 500) (19 920) () (675) 5 (150) (50) (460) 000 35 (1 295) % Variation (23) (24.5) (19.5) (19.5) (10) (23) 78 (15)

Actual Patient days Weight of laundry processed (kg) Department expenses Wages Supervisor salary Washing materials Heating and power Equipment depreciation Allocated administration costs Equipment maintenance 8 000 101 170 () 4 125 1 490 920 560 250 2 460 00 10 9 815

Budget 6 500 81 250 () 3 450 1 495 770 510 250 2 000 00 45 8 520

Comment: We need to have a discussion about the overexpenditure of the department. You are required to: (a) discuss in detail the various possible effects on the behaviour of the laundry supervisor of the way that her budget was prepared and the form and content of the performance report, having in mind the published research findings in this area, (15 marks) (b) re-draft, giving explanations, the performance report and supporting memorandum in a way which, in your opinion, would make them more effective management tools. (10 marks) (Total 25 marks) ICAEW P2 Management Accounting

Question IM 16.22 Advanced: Aspiration levels

Individual performance measurement is likely to be related to the aspiration level of the individual and the timing and level of the target set. Discuss the above statement in the context of each of Tables 1 and 2. The tables provide illustrations expressed in terms of output, of the results of two separate studies linking targets, aspiration levels and achievement. (15 marks) Table 1 Actual achievement (units) Aspiration level set by individual before knowing target 53 45 54 40 Aspiration level set by individual after knowing target 57 44 54 60

Target Implicit Explicit: low Explicit medium Explicit: high

Target Units not quoted 35 50 70

Average 55 44.5 54 50

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Table 2 Aspiration level of individual (where target is known) (units) 80 90 100 120 110 nil

Target (units) 70 90 110 130 150 180

Actual achieved (units) 80 90 100 112 90 80

ACCA Paper 9 Information for Control and Decision Making Incorporated Finance plc is a finance company having one hundred branch offices in major towns and cities throughout the UK. These offer a variety of hire purchase and loan facilities to personal customers both directly and through schemes operated on behalf of major retailers. The main function of the branches is to sell loans and to ensure that repayments are collected; the head office is responsible for raising the capital required, which it provides to branches at a current rate of interest. Each year branch managers are invited to provide estimates of the following items for the forthcoming year, as the start of the budgetary process: Value of new loans (by category e.g. direct, retail, motor) Margin percentage (i.e. loan rate of interest less cost of capital provided by head office) Gross margin (i.e. value of new loans margin percentage) Branch operating expenses Net margin (i.e. gross margin less operating expenses) The main branch expenses relate to the cost of sales and administrative staff, and to the cost of renting and maintaining branch premises, but also include the cost of bad debts on outstanding loans. These estimates are then passed to headquarters by area and regional managers and are used, together with other information such as that relating to general economic conditions, to set an overall company budget. This is then broken down by headquarters into regional figures; regional managers then set the area budgets and area managers finally set branch budgets. However, a common complaint of branch managers is that the budgets they are set often bear little resemblance to the estimates they originally submitted. Budget targets are set for the five items specified above, with managers receiving a bonus based on the average percentage achievement of all five targets, weighted equally. Requirements (a) Discuss the advantages and disadvantages of allowing managers to participate in budget-setting, and suggest how Incorporated Finance plc should operate its budgetary system. (15 marks) (b) The managing director is considering changing the performance evaluation and bonus scheme so that branch managers are set only a net margin target. Prepare a report for him outlining the advantages and disadvantages of making such a change. (10 marks) (Total 25 marks) ICAEW P2 Management Accounting

Question IM 16.23 Advanced: Advantages and disadvantages of participation and comments on a new performance measurement and evaluation system

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