budgeting question 4 (dec 2012) f5 exam

Hi,

Please have a look at my thoughts to the question and tell me as an estimate how well would I score out of a 20:

A. A monthly rolling budget is whereby the company prepares a new budget every months, usually for the next 12 months, by adding a period (in this case a month) to the end and removing a period (in this case a month) from the beginning.
So Designit could prepare a budget every month, for the next 12 months ahead, regarding its estimated and expected sales revenues and volumes. Every month, the budget would be altered according to the market conditions and rolling budgets are best suited for unstable environments, where the certainty of certain outcomes can’t be predicted with confidence.
B. As we know, the company only has one part – qualified accountant, so introducing rolling budgets would certainly prove problematic. This is because the part – qualified accountant already has excess work (a heavy workload) and thus preparing a rolling budget monthly would require a lot of time and this the accountant has not got. So the whole idea of preparing rolling budgets is a very time consuming process and thus may also lead to ineffectiveness of the part qualified accountant in other areas of his work as he spends time preparing monthly rolling budgets. The accountant isn’t fully qualified and thus may need training in order to understand how to prepare rolling budgets and to understand how the whole system of rolling budgets works. This may be a cost that Designit needs to bear and may also lead to loss of productivity as the part qualified accountant may go for off the job training to understand rolling budgets and not undertake his actual duties. Lastly, the organization must ensure that it acquires accurate information of the market as a whole and expected sales demand. This is because if it bases its rolling budgets on inaccurate information (and this means that inaccurate or excessively difficult targets are set) and the sales managers are given their rewards based on achieving these inaccurate targets, then the reward system of bonuses will not work. So the burden of getting correct information is great in order to ensure that the reward system works accordingly to plan. After all, there is no need of rolling budgets as the market is stable from year to year and this fact doesn’t justify the problems the company will go through in changing its budgeting system.
C. So the current bonus scheme is that it doesn’t bring enough commitment from the sales managers. This is because it just sets an “average or normal” level of target that is being achieved anyways every year so the sales managers are not motivated to work harder or better as they are not feeling challenged enough. Their personal aspirations to get a sense of achievement from work are not being met. Well, there is an upper target to be met but this is set at an ideal level of performance and requires exceptional effort to achieve and is quite challenging. Managers don’t find this target reasonable to achieve and thus aren’t motivated to achieve it. After all, the level of bonuses is small. Only a 5% increase from the low level of target achievement. The extra hard work to achieve sales of a further 1,500,000 certainly isn’t worth is by just an extra 5% increase in bonuses! Because managers secure the low level of target early in the year, this suggest that this is very easy to achieve and may suggest that there is underestimation of the low level of target sales (budget slack) and therefore the fixed budget (which maybe using a system of incremental budgeting) is to be criticized. The budget should be prepared as per what is supposed to be expected from the future and not based on the past (feed forward control). I suggest that the targets be revised first of all. The low level of achievement should become like more challenging, say, 2,000,000 so that managers don’t achieve the targets early in the year and the rate of challenge is increased. Then it maybe also possible to reward them with a greater percentage (as the business is mature) say like 30% so managers are more committed to achieving the target. And the higher target should have a higher rate of return (like an extra 10% on the basic target).
D. Spreadsheets are often based on assumptions which may be “hidden” or unknown and preparing a budget on unknown spreadsheets assumptions is risky as it may lead to inaccurate figures being computed
There is a further problem of original data entry. The accountant may have entered wrong figures into the spreadsheet initially and this affects all other working and may lead to wrong targets being set or wrong decisions being made.
Sometimes other parties concerned may require training to learn the spreadsheet’s mechanisms, and this costs both time and money.
Because it is so easy to make changes to a spreadsheet model for a budget and produce a new version of a budget, there is a danger that a large number of different versions of a budget might be produced, and managers might get confused about which is the ‘official’ version.