Management control systemsQuestion 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 116 MANAGEMENT CONTROL SYSTEMS (11 marks) (b) explain • the manner in which management information systems can distort the functioning of the business operations they are meant to serve. • explain the role that performance evaluation plays in a management information system. (a) • explain the concepts of management information system design. describe the meaning of and write notes on four of the following terms: Feedback control. (8 marks) (b) Discuss the motivational implications of the level of efficiency assumed in establishing a budget. The problem is that business operations do not function like machines. and the role that such systems play in the financial control of business operations. responsibility accounting. Feedforward control. zero-base budgeting. feedback.7 Advanced Question IM 16.8 Advanced Question IM 16. (9 marks) (c) explain how the use of PCs. Aspiration level.6 Advanced Question IM 16. then it can easily distort the functioning of a business operation. (5 marks) (Total 25 marks) CIMA Stage 3 Management Accounting Applications (a) In the context of budgeting. Budgetary slack. • compare and contrast output controls and input controls in the context of a management information system. (20 marks) ACCA P2 Management Accounting Question IM 16. (17 marks) ACCA Level 2 Management Accounting ‘Budgeting is too often looked upon from a purely mechanistic viewpoint. Unless a financial control system is very well designed and managed. The human factors in budgeting are more important than the accounting techniques.’ One comment on the design and use of financial control systems Requirements Having regard to this comment. spreadsheets and databases contributes to the costeffectiveness of management information systems. provide definitions for four of the following terms: aspiration level. The success of a budgetary system depends upon its acceptance by the company members who are affected by the budgets.‘Textbooks on accounting often describe management information and financial control systems as if they work in exactly the same way as machine control systems. (9 marks) (Total 17 marks) ACCA Level 2 Management Accounting In the context of budgeting. Many accountants appear to assume that they do work in this way. In the course of your discussion present at least one practical illustration to support your conclusions. • he action that might be taken by the chartered management accountant in order to avoid such distortion. Control limits.’ Discuss the validity of the above statement from the viewpoint of both the planning and the control aspects of budgeting. budgetary slack. Noise.9 Advanced MANAGEMENT CONTROL SYSTEMS 117 . ’ Discuss this statement in relation to the design and implementation of budgetary control systems. (7 marks) (Total 17 marks) (a) An extensive literature on the behavioural aspects of budgeting discusses the propensity of managers to create budgetary slack. ‘Motivation is the over-riding consideration that should influence management in formulating and using performance measures. (6 marks) (b) Managerial behaviour can be quite different from that discussed in (a).14 Advanced 118 MANAGEMENT CONTROL SYSTEMS . and in designing management control systems. There are theories which attempt to explain the consequences for the design of management accounting systems of disparate situations. Hopwood. and how senior managers can identify these attempts to distort the budgetary system. (6 marks) (c) Sections (a) and (b) above are examples of differing managerial behaviour in disparate situations.13 Advanced Question IM 16. You are required to explain circumstances in which managers may be motivated to set themselves very high. (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.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. Accounting and Human Behaviour). However.12 Advanced Question IM 16. one of which is contingency theory. (13 marks) (Total 25 marks) CIMA Stage 4 Management Accounting – Control and Audit Question IM 16. (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. You are required to explain three ways in which managers may attempt to create budgetary slack. possibly unachievable budgets. (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.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.Question IM 16. 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. Discuss this statement in relation to budgeting and standard costing.’ You are required: (a) To identify and discuss four situations where accounting control systems might not motivate desirable behaviour. Question IM 16. 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. discussed the problem with the Managing Director and suggested that appropriate action be taken to reduce budgetary slack. Include row and column headings.24 A Question IM 16. The Managing Director expressed doubts.00 F 4. to minimise budgetary slack. Discuss whether the budget review and approval process should permit managers to build in some budgetary slack. Requirement: Explain the arguments that can be advanced for accepting some budgetary slack.17 A 1. Required: Prepare a report addressed to the management team which comments critically on the monthly variance report. and by senior management when approving budgets. but do not calculate the contents of the report. explaining what steps can be taken by you.00 A 7. This has been sent to the appropriate product manager as part of PDC Limited’s monitoring procedures. write a report to your Finance Director.15 Advanced Question IM 16.00 F 4. (8 marks) (b) The Finance Director.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. having read the report referred to in part (a). and the advantages of this to the manager being appraised and to the organisation. Include as an appendix to your report the layout of a revised monthly variance report which will be more useful to the product manager. stating that in his opinion removing all budget padding could cause considerable problems. Requirements: (a) As Management Accountant. (12 marks) (Total 20 marks) CIMA Stage 4 Management Accounting Control Systems (a) The following report has been prepared.19 A 17.An article in Management Accounting concluded that there will always be some budgetary padding in any organisation.95 A 5.67 A 2. 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. (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 MANAGEMENT CONTROL SYSTEMS 119 . relating to one product for March. (6 marks) (Total 20 marks) ACCA Paper 8 Managerial Finance 120 MANAGEMENT CONTROL SYSTEMS . 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. (2 marks) (c) Discuss the problems associated with the forecasting of figures which are to be used in flexible budgeting.17 Intermediate: Preparation of flexible budgets and an explanation of variances You have been provided with the following operating statement.Question IM 16. (12 marks) (b) Explain why the original operating statement was of little use to management. 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. For many years. these responsibilities passed to the Head Teacher of Mayfield School. The last budget statement prepared by Midshire County Council is reproduced below. Midshire County Council was responsible for preparing and reporting on the school budget. From June. You have recently accepted a part-time appointment as the accountant to Mayfield School. Jim Smith is hoping that you will be able to apply that experience to improving the financial reporting procedures at Mayfield School. 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. Mayfield School: Student numbers as at 31 May School year 1 2 3 4 5 6 7 Total number of students MANAGEMENT CONTROL SYSTEMS Age range 11–12 12–13 13–14 14–15 15–16 16–17 17–18 Current number of pupils 300 350 325 360 380 240 0220 2175 121 . 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. Jim Smith provides you with the following breakdown of student numbers. although your previous accounting experience has been gained in commercial organisations. (c) give two advantages of your proposed format over the existing format.Data Jim Smith has recently been appointed as the Head Teacher of Mayfield School in Midshire. etc. Your memo should: (a) identify four weaknesses of the existing statement as a management report. The age of the pupils ranges from 11 years to 18 years.) 120 673 Repairs and maintenance 458 Lighting and heating 59 720 Rates 23 826 Fixed assets: furniture and equipment 84 721 Stationery. It covers the ten months to the end of May and all figures refer to cash payments made. Data The income of Mayfield School is based on the number of pupils at the school. however. (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). 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 MANAGEMENT CONTROL SYSTEMS 122 . elect to go to Mayfield School. Sales policies. purchasing and the direction of the company was handled from head office in London. Not all pupils.9 0.19 Advanced: Design of a management control system Maxcafe Ltd sold its own brand of coffee throughout the UK. • pupils currently in school-year 7 leave to go on to higher education or employment. 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. however. The new year 1 pupils come from the final year at four junior schools. there is an option to leave the school. The company operated three roasting plants in Glasgow. As a result only 80% of the current school-year 5 pupils go on to enter school-year 6.8 0. The number of pupils in the final year at each of the four junior schools is given below along with Jim’s estimate of the proportion likely to choose Mayfield School. Each plant had profit and loss responsibility and the plant manager was paid a bonus on the basis of a percentage on gross margin. • of those currently in school-year 6 only 95% continue into school-year 7.Jim also provides you with the following information relating to existing pupils: • pupils move up one school-year at the end of July.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. • the annual income per pupil is £1200 in years 1 to 5 and £1500 in years 6 to 7. AAT Technicians Stage Question IM 16.9 0. Hull and Bristol. • for those pupils entering year 6. calculate the budgeted surplus or deficit of Mayfield School for next year. Junior School Ranmoor Hallamshire Broomhill Endcliffe Number in final year at 31 May 60 120 140 80 Proportion choosing Mayfield School 0. 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. purchase commitments were made that would provide for delivery in 3 to 15 months from the date that contracts for purchases were made. At the time of actual delivery.Each month the plant manager was given a production schedule for the current month and a tentative schedule for the next month. The result was that the purchasing department was buying a range of coffees for advance delivery at special dates. While it was possible to purchase from local brokers for immediate delivery. The objective of the purchasing department was to ensure that any one of forty grades of special coffee was available for the roasting plants. When special coffee was delivered to a plant. A most important factor was the market ‘know-how’ of the purchasing department. 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. with the result that a net cost per bag was developed for each purchase. with no element of profit or loss. 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. Required: (a) An explanation to the managing director indicating any weaknesses of the current control system. The procurement of special coffee for roasting operations was also handled by the purchasing department at Head Office. 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. In accounting for coffee purchases a separate record was maintained for each purchase contract. Credit collection and payment was done by Head Office. MANAGEMENT CONTROL SYSTEMS 123 . and (b) an explanation of what changes you consider should be made in the present reporting and control system. the sales of the company’s coffee might not be going as anticipated when the purchase commitment was made. a charge was made for the cost represented by the contracts which covered that particular delivery of coffee. When special coffee was sold to outsiders. who must judge whether the market trend was up or down and make commitments accordingly. the sales were likewise costed on a specific contract basis with a resulting profit or loss on these transactions. Based on estimated sales budgets. This record was charged with coffee purchased and import and transport expenses. The established policy was to treat each contract on an individual basis. The Finance Director has been asked to prepare a number of reports on the issues involved. said that the Divisional General Manager could have maintained both strategic plan market share and selling prices by an alternative approach. a bonus of 100% of salary is paid. had he known last year. A schedule of summary available data is given below. If budget is not achieved no bonus is paid. he thought. and has asked you to prepare some of these. The Divisional General Manager has commented that action now. The approach. at the time of producing the budget. almost half way through the year. where stronger than anticipated growth had occurred.Question IM 16. The scheme is simple: the divisional profit (PBIT) is compared with the budget for the year. He has decided to use the results for Division X as an example on which the various discussions could be based. Reliable statistics on market size are available annually. 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. You are the group management accountant of a large divisionalised group. Intermediate achievements are calculated pro rata. The Group Managing Director. he could have taken the necessary action to maintain the strategic plan market share. a revised market estimate of 165 000 units for 2001 is agreed by group and divisional staff in May 2001. 124 MANAGEMENT CONTROL SYSTEMS . However. Based on the market size for 2000. should have been • maintaining expenditure on product development and marketing at 20% of sales over the years. which is the upper limit of the bonus scheme. If twice budgeted profit is achieved. commenting on the same data. that the market was growing faster. • spending his time controlling production costs instead of worrying about annual bonuses.20 Advanced: Comments on an existing performance measurement and bonus system and recommendations for improvement 1. This is a significant increase on the estimate of 150 000 units made in May 2000 and used since. is unlikely to produce significant results during this year. 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 actions would have been • cutting prices by £10 per unit below the price at present charged and used in the latest estimate for 2001. as the maintenance of market share depends on a flow of well-promoted new models. If budget is achieved a bonus of 20% of salary is earned. High expenditure is required on product development and advertising. • increasing marketing expenditure by £300 000 compared with the strategic plan. showing calculations if appropriate. (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 hospital facilities being used to full capacity only in the second and subsequent quarters. He is not convinced that this should be extended to divisional managers. (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. making appropriate comparisons with Budget. (8 marks) (c) to make specific proposals. Responsibility accounting means that you are accountable for ensuring that the expenses of running your department are kept in line with the budget. MANAGEMENT CONTROL SYSTEMS 125 .21 Advanced: Budget use and performance reporting Attached is the Quarterly Performance Report for your department. Present the results in such a form that the Board can easily understand the problems involved. with Plan and with new available data. 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.You are required: (a) to analyse and comment on the results of Division X. for an alternative bonus scheme. Rockingham Private Patients Hospital Ltd MEMORANDUM To: From: All Department Heads/Supervisors Hospital Administrator 30 April Question IM 16. 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. not late February. (d) Explain and discuss the case for extending bonus schemes widely throughout the organisation. but she had had to take on a fourth during the quarter due to the extra work. She knew she was responsible for her department and had made every endeavour to run it as efficiently as possible. The hospital has adopted a responsibility accounting system so you will be receiving one of these reports quarterly. reflecting your analysis in (a). and certainly not to senior managers below this level in divisions and head office. 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. Copies of both documents are set out below. This extra hiring had been anticipated for May. together with an explanatory memorandum. The supervisor had never seen the original budget. The first three months were expected to be a settling-in period. (8 marks) A non-executive director has commented that he can understand the case for linking executive directors’ rewards to group results. nor had she been informed that there would be a quarterly performance report. In May the supervisor of the laundry department received her first quarterly performance report from the hospital administrator. Each report compares the actual expenses of running your department for the quarter with our budget for the same period. 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. in your opinion. Discuss the above statement in the context of each of Tables 1 and 2. aspiration levels and achievement. The tables provide illustrations expressed in terms of output. having in mind the published research findings in this area. 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.5) (19. would make them more effective management tools.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.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. (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. giving explanations. of the results of two separate studies linking targets. (15 marks) (b) re-draft.5) —(19.5 54 50 126 MANAGEMENT CONTROL SYSTEMS . (10 marks) (Total 25 marks) ICAEW P2 Management Accounting Question IM 16. the performance report and supporting memorandum in a way which. a common complaint of branch managers is that the budgets they are set often bear little resemblance to the estimates they originally submitted. Requirements (a) Discuss the advantages and disadvantages of allowing managers to participate in budget-setting. together with other information such as that relating to general economic conditions. However.g. weighted equally.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.e. The main function of the branches is to sell loans and to ensure that repayments are collected. Budget targets are set for the five items specified above. (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.23 Advanced: Advantages and disadvantages of participation and comments on a new performance measurement and evaluation system MANAGEMENT CONTROL SYSTEMS 127 . as the start of the budgetary process: Value of new loans (by category e. and suggest how Incorporated Finance plc should operate its budgetary system. motor) Margin percentage (i. retail. regional managers then set the area budgets and area managers finally set branch budgets. loan rate of interest less cost of capital provided by head office) Gross margin (i. which it provides to branches at a current rate of interest. (10 marks) (Total 25 marks) ICAEW P2 Management Accounting Question IM 16. value of new loans × margin percentage) Branch operating expenses Net margin (i. but also include the cost of bad debts on outstanding loans. These offer a variety of hire purchase and loan facilities to personal customers both directly and through schemes operated on behalf of major retailers. with managers receiving a bonus based on the average percentage achievement of all five targets.e. These estimates are then passed to headquarters by area and regional managers and are used. direct. Each year branch managers are invited to provide estimates of the following items for the forthcoming year. gross margin less operating expenses) The main branch expenses relate to the cost of sales and administrative staff.e. Prepare a report for him outlining the advantages and disadvantages of making such a change. and to the cost of renting and maintaining branch premises. the head office is responsible for raising the capital required. to set an overall company budget. This is then broken down by headquarters into regional figures.