Solutions to Assignments
MCO-05 Accounting for Managerial Decisions
Question 2
(a) What do you understand by zero base budgeting? How is it different from traditional budgeting?
Zero-based budgeting (ZBB) is a budgeting approach that involves developing a new budget from scratch every time (i.e., starting from “zero”), versus starting with the previous period’s budget and adjusting it as needed. In theory, this forces decision makers to constantly look at the business with fresh eyes, free from the limitations of past assumptions and targets.
Implemented effectively, ZBB is a cost discipline enabling businesses to improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can empower businesses to identify how to best course-correct for the months ahead.
Done right, ZBB can translate into cost savings that fund future strategic initiatives and drive growth.
- Examples on Zero based Budgeting
The good news for zero-based budgeting users is they appear to be moderately more successful at meeting their cost targets. Sixty-three percent of respondents, globally, who did not conduct ZBB did not meet their cost targets, while the same is true for 58 percent of those that did use ZBB. Although ZBB users in the US reported higher cost program failure rates than non-ZBB users (65 percent vs. 57 percent), in all other regions the failure rate for ZBB users was lower than for non-ZBB users (57 percent failure rate vs. 68 percent in Latin America; 52 percent vs. 56 percent in Europe; and 60 percent vs. 71 percent in the Asia Pacific).
However, companies using ZBB tend to report higher barriers to effective cost management, which suggests ZBB may be more difficult to implement and use than other cost management methods. Two barriers that ZBB users rate particularly high are “weak/unclear business case” (42 percent vs. 25 percent for non-ZBB users) and “poorly designed tracking and reporting” (43 percent vs. 23 percent for non-ZBB users)
In the US, high-cost targets and high failure rates suggest companies might be misapplying zero-based budgeting, using a tactical approach to pursue aggressive targets that likely require strategic cost actions. In Brazil, where ZBB first rose to prominence, declining usage seems to be driven by implementation challenges.
Use of ZBB is expected to remain flat in the Asia Pacific, except in China, where it is expected to rise—perhaps due to lower implementation barriers and lower failure rates.
In Europe, use of zero-based budgeting is relatively low but expected to hold steady. Cost targets in the region are much less aggressive than elsewhere; also, structured approaches to cost management are much less common. In this environment, ZBB—as a structured approach—may be appealing to some companies simply because it is better than nothing.
- How zero-based budgeting is different from traditional budgeting
The ZBB methodology operates in stark contrast to traditional annual budgeting approaches. Traditional annual budgets are often produced by taking the previous year’s actuals and adding a few percentage points to account for wage rises and inflation. This simplified and incremental budgeting can lead to inefficiencies and missed opportunities for greater cost savings.
ZBB requires organizations to build their annual budget from zero each year (thus its name) to help verify all components of the annual budget are cost-effective, relevant, and drive improved savings.
Here is a brief outline of the principles of both traditional cost-cutting and a zero-based approach.
(b) “Responsibility accounting is a responsibility set-up of management accounting”. Comment.
Responsibility accounting is a kind of management accounting that is accountable for all the management, budgeting, and internal accounting of a company. The primary objective of this accounting is to support all the Planning, costing, and responsibility centres of a company.
The accounting generally includes the preparation of a monthly and annual budget for an individual responsibility centre. It also accounts for the cost and revenue of a company, where reports are accumulated monthly or annually and reported to the concerned manager for the feedback. Responsibility accounting mainly focuses on responsibilities centres.
For instance, if Mr X, the manager of a unit, plans the budget of his department, he is responsible for keeping the budget under control. Mr X will have all the required information about the cost of his department. In case, if the expenditure is more than the allocated budget than Mr X will try to find the error and take necessary action and measures to correct it. Mr X will be personally accountable for the performance of his unit.
A responsibility accounting report contains those items controllable by the responsible manager. When both controllable and uncontrollable items are included in the report, accountants should clearly separate the categories. The identification of controllable items is a fundamental task in responsibility accounting and reporting.
To implement responsibility accounting in a company, the business entity must be organized so that responsibility is assignable to individual managers. The various company managers and their lines of authority (and the resulting levels of responsibility) should be fully defined. The organization chart below demonstrates lines of authority and responsibility that could be used as a basis for responsibility reporting.
To identify the items over which each manager has control, the lines of authority should follow a specified path. For example, in the picture above we show that a department supervisor may report to a store manager, who reports to the vice president of operations, who reports to the president. The president is ultimately responsible to stockholders or their elected representatives, the board of directors. In a sense, the president is responsible for all revenue and expense items of the company, since at the presidential level all items are controllable over some period. The president often carries the title, Chief Executive Officer (CEO) and usually delegates authority to lower level managers since one person cannot keep fully informed of the day-to-day operating details of all areas of the business.
The manager’s level in the organization also affects those items over which that manager has control. The president is usually considered a first-level manager. Managers (usually vice presidents) who report directly to the president are second-level managers. Notice on the organization chart that individuals at a specific management level are on a horizontal line across the chart. Not all managers at that level, however, necessarily have equal authority and responsibility. The degree of a manager’s authority varies from company to company.
While the president may delegate much decision-making power, some revenue and expense items remain exclusively under the president’s control. For example, in some companies, large capital (plant and equipment) expenditures may be approved only by the president. Therefore, depreciation, property taxes, and other related expenses should not be designated as a store manager’s responsibility since these costs are not primarily under that manager’s control.
The controllability criterion is crucial to the content of performance reports for each manager. For example, at the department supervisor level, perhaps only direct materials and direct labor cost control are appropriate for measuring performance. A plant manager, however, has the authority to make decisions regarding many other costs not controllable at the supervisory level, such as the salaries of department supervisors. These other costs would be included in the performance evaluation of the store manager, not the supervisor.
No comments:
Post a Comment