Budgetary Control – CA Final SCMPE Study Material

Budgetary Control – CA Final SCMPE Study Material is designed strictly as per the latest syllabus and exam pattern.

Budgetary Control – CA Final SCMPE Study Material

Question 1.
(Feedback & Feed-forward control)
Meaano is a major potato chips and snacks manufacturer based out of Delhi and Nagpur. The company has manufacturing plants in a wide variety of locations and have their own retail chain stores. While comparing the actual cost with the budgeted data of last year, it was revealed that marketing costs were much higher than the budgeted cost while it has no impact on sale. Sale is stagnant for past two quarters thus distorting the expectations of cash budget. The managing director of the company has collected various information to understand the scenario.
Explain the difference between feedback and feed-forward information p within the context of a budgetary control system.
The feedback of information relates to the reporting of things that have happened in the past. For example, a financial control report may state what costs have been incurred over the past quarter – this is feedback. The feed-forward of information relates to the reporting of things which are expected or forecast to happen in the future. For e.g., a financial control I report may state what costs are presently forecast to be ‘from now to year I end’ – this is feed-forward.

Budgetary Control – CA Final SCMPE Study Material

Question 2.
Flavour is one of the famous ice cream brand. Flavour is churning out quality and innovative products. The company is working towards brand development, enhancement of product portfolio, and strengthening of retail distribution network. It has also now shifted focus from B2B to B2C and is simultaneously working towards improving the ratio of milk procurement from farmer. Flavour company produces its annual budget to the general meeting of board. It includes details of budgeted sales volume, revenues and costs for each month. The financial manager of the company compares actual performance against the budgeted for every month. At the beginning of the month, Flavour conducts a review of its competitors to produce a revised product sales forecast.
This revised forecast for product sales is used to devise pricing policies and promotional campaigns to ensure that budgeted targets are met.
Compare and contrast the use of feed forward control and feedback control, using the information given about Flavour Company.
Feedback control is a control activity that takes place after a process is | complete. It is also known as post action control. If any problem is identified after a process is complete, a corrective action is taken to rectify the problem. It involves the comparison of actual results against an expected i position. If there is any difference between the actual and expected position i than such variance should be investigated, but its should be noted that the reasons lor the differences experienced in past may not be a determinant d for future results.

Feed back control provides information only after the process is complete and sometime a significant time is lost to take corrective action. It enables further action to be taken and therefore a modification in subsequent periods to achieve the required results. At Flavour, the comparison of actual results against the budget set at the start of the year is an example of feedback control. Feedback is reactionary and is based on historical data.

Feed Forward Control
Feed forward control is also referred to as preventive control. The rationale j behind feed-forward control is to foresee potential problems and take corrective action to ensure that the final output is as expected. For this they use latest forecast of results to compare to a required position, which is usually | generated in the light of information that was not available at the time of setting original plan. Since in feed forward control the latest forecast is an | estimation of future results and its aim is to proactively anticipate any issue and so it is differs from feedback control. Feed forward control compares [ a latest forecast to a required position which is different from feedback.

The comparison of the latest forecast position with the required position is an example of feed forward control at Flavour. The latest demand information is based on different assumptions than those used in the original plan and as such Flavour will pre-empt the impact of these changes by assessing variances between the forecast and the required position.
Feed forward identifies potential problems before they occur whereas feedback identifies problems after they have happened.

Question 3.
(Case Scenario) (Feedback & Feed-forward control)
Toyada corporation Manufactures tight lubricant oils For vehicles (two wheelers, autos, four wheelers and heavy trucks) The organization offers light lubricant oils in various packages ranging from a 100 ml pouch to a 200 liters drum. About 70% of lubricant sales comprise are made in the form of 900 ml ‘cans’. The process of manufacturing and packaging lubricant oils are given below:

  • Base oil of required grade is imported from middle east.
  • The base oil is blended with additives at the manufacturing plants at specified temperatures to produce lubricant oils.
  • The oil is stored for a day to bring the temperature to normal.
  • The plant has an automated bottling facility. The operator is required to pre-set the quantity and number of ‘cans’ to be filled in a computerized system. No manual intervention is required thereafter,
  • The product is filled in ‘cans’ at the first stage of packaging with 900 ml of product.
  • Caps are fixed on the ‘cans’ and sealed at the second stage of packaging.
  • The product is weighed at third stage of packaging (a conversion factor is used to cover volume into weight) before the ‘cans’ are packed into a carton.

Any ‘can’ having lesser quantity of oil is removed before the ‘cans’ are packed into the cartons. The ‘cans’ which are short filled cannot be reused. Once the seal is broken, the ‘can’ is of no use. There is no process by which the oil in short filled ‘can’ could be reused. Hence the product is wasted.
The company is considering a proposal to add a component in its packaging unit to avoid losses arising out of quantity issues in packaging. The component will be installed after the first stage of packaging. The component will measure the volume of product and will forward the ‘can’ for capping and sealing only if the quantity in ‘cans’ is correct, In case the ‘can’ does not have required volume of product, the ‘can’ will be topped up with balance product before the capping and sealing process. The company will be able to achieve 0% wastage due to short filling after implementation of news system.
Using the context of control systems, IDENTIFY and EXPLAIN the type of control which is existing in the company and the type of control which is proposed. [MTP April 2019]
What is Control?
Control is a management function which involve establishing the benchmarks and comparing actual performance against the benchmarks and taking corrective actions. In order to achieves its intended objective., the organization is require to implement control at all levels. There are two types of control systems – Feed-forward Control and Feedback Control.

Feed-forward Control
Feed-forward Control is also known as a preventive control. The rationale behind feed-forward control is to anticipate potential problems and take corrective action to make sure that the final output is as expected. Feed-forward controls are worthwhile because they allow management to prevent problems rather than having to cure them later. It is costly to implement Feed – forward control as it requires additional investment and resources. These are designed to find deviation some standard or goal to allow correction to be made before a particular sequence of actions is completed.

The proposed system in Toyada corporation is a Feed-forward control. In this case, any shortage in filling is identified during the packaging process itself and accordingly the corrective action is taken to ensure that the final packed ‘can’ has proper quantity of product in it. The new process is beneficial to the Toyada corporation as the wastage arising out of the packaging process can be avoided. The savings must be compared with the cost needed to modify the packaging process before finalising on whether the new’ system should be implemented or not.

Feedback Control
Feedback Control is a control activity that takes place after a process is finish and It is also known as post action control. If any problem is identified after completing a process, a corrective action is required to rectify the problem.

The information is obtain through feedback control only after the process is complete and sometime a significant time is lost to take corrective action. The advantage of feedback control system is that it is simple and easy to implement.

Toyada corporation at present has a feedback control mechanism in place. The actual volume of the unit produce is measured at the end of the packaging process. The present control process is that any ‘can’ which is short filled is not packed in the carton. This make certain that a lower quantity of product is not supplied into the market. The present control system, however leads to product losses as identification of short-filled ‘cans’ at the end of process is not useful to the production process. In case, there is a vast variation in the final packaging, the packaging system can be 1 reviewed to make sure that such problems do not acquire in the future.

Budgetary Control – CA Final SCMPE Study Material

Question 4.
(Feedback & Feed-forward control)
SAW & Co is a firm of Chartered Accountants having head office at Delhi and four branches in different parts of Northern region. They are providing wide range of services to their esteemed clients. Their core services include Taxation, Corporate Audits, Bank Audits, Management Audits and Project financing. The firm is preparing its budgets for the financial year 2020-2021.
The senior partners of the firm have stated that they would like to pay off the firm’s loan taken from a public sector bank two years back for the renovation of their office premises this year and to have a positive cash reserve of ₹ 2,00,000 by the end of the year.
While comparing the actual cost with the budgeted data of last year, it was revealed that travelling costs were much higher than the budgeted costs. Fees receivable from few clients were pending for more than three years thus distorting the expectations of cash budget.
DISCUSS: the differences between feed forward control and feedback control using the above information about the cash budget of SAW & Co. (10 Marks) [MTPNov. 2019] (10 Marks)
Feed Forward System
Feed forward systems is a preventive control system which involves the comparison of draft plans with the objectives of the company. In the present scenario of SAW & Co consultancy, firm has an number of objectives, two of which are related to their cash flow. First of the objective is related to pay off the loan by the year end and the second is to have a positive cash reserve of ₹ 2,00,000 by the year end.
An initial cash budget draft of the firm will be produced based on the expected receipts, payments and other cost of the firm. This cash budget should also show the cash inflow and outflows for each month so that the firm can identify its expected monthly cash balance. This budget can be use to compare the company’s objectives to see if their cash : balance objectives are being achieved. So, this comparison is the process of feed forward control. The logic behind feed forward control is : to foresee potential problems and take corrective action to ensure that the final output is as expected. Feed forward controls are also relevant as they allow management to prevent problems rather than having to cure them later. It is costly to implement feed forward controls as it requires additional resources and investments.

Feedback Control System
Feedback control systems involves comparison of actual results against the budget that has been approved. Thus in context of SAW & Co., actual travelling costs are compared against budgeted cost are overdue fees receivables are also the process of feedback control.

If any budget are compare with the actual, adverse or favourable variance may arise. If such variance are significant then further analysis may be needed to determine its cause. This comparison process is feedback control or post action control. When any problem is identified after a process is complete, a corrective action is taken to rectify the problem. Feedback based system have the advantage of being simple and easy to implement.

Thus, initially the difference between feed-forward control and feed- j back control systems is that feed forward occurs in the budget setting 1 stage while feedback control occurs during the year. This means that I feed forward identifies potential problems before the problem actually occur whereas feedback identifies problems after they have happened.

Budgetary Control – CA Final SCMPE Study Material

Question 5.
(Feedback & Feed-forward control)
MAP & Co, is a leading strategic cost management consulting firm is preparing its budget for the year 31st march, 2021. The company has face recently many challenges due to COVID and one therefore one of the partner ‘Mr Rachit’ is concerned about the liquidity of the firm, he argued that if the firm will have adequate liquidity, it has less risk of being unable to meet their liabilities than a liquid one. Mr Rachit also believes that if a firm has adequate liquidity it has possibility of enriched profitability through reduced interest outlay or increased interest income, together with greater financial flexibility to negotiate enhanced terms with suppliers and financiers or participate in new business opportunities. Accordingly, he desires to reduce the firm’s CC to zero by 30th September, 2020 and to have a positive cash balance of ? 1,45,000 by the end of the year.
COMPARE and CONTRAST, feed forward control and feedback control in context of the above information.
Feed- forward control involve comparison of actual results with that of the desired results, such forecasts are made of what result are expected to be at some future time. If the expectation is different from the desired result, control actions are taken that will minimise the gaps.
In the present scenario, MAP & Co has the following two expectations
– the first of these is to reduce the CC to zero by 30th Sep., 2020 and
– the second is to have a positive cash balance of ₹ 1,45,000 by 31st March, 2021.
So as to achieve the above expectations, a cash budget will be prepared based on various functional budgets showing cash inflows and outflows for each month so that the firm can identify its expected monthly cash balance. This can then be compared with the firm’s anticipation to see if their cash balance objectives are being attained. However, if the objectives are not met by these budgets, these budgets may need to be revised by changing the levels of activities. This process is called feed-forward control.

Feedback control systems involves comparison of actual results against the budget that has been approved, monitoring the results and taking whatever corrective action is necessary if a deviation exists.

This for MAP & Co, a comparison of the actual monthly cash balance can be made against the budgeted cash balance for that month. If and variances arises after comparison of budget with actual and if this is substantial, then further analysis may be needed to determine the reason. It may be observe that costs of above budgets, cash receipts is lower than expected or receivables took less time to pay than expected, or payables were paid later than expected. This comparison process is feedback control.
Conclusion: Feed forward control attempts to take corrective action before an event, whereas feedback control takes corrective action after the event.

Question 6.
(Effect of the Budget Difficulty on Performance)
“A very frustrating work culture is created by Mr Shiv at Universal mfg. Ltd, he is very dominating and expects everything to be done his way. We have done exceptional work to get up to budget, and the minute we make it he tightens the budget on us. We can 7 work any faster and still maintain quality. We always seem to be interrupting the big jobs for all those small rush orders. The accountants seem to know everything that’s happening in my department, sometimes even before I do. j I thought all that budget and accounting stuff was supposed to help, but it just gets me into trouble. I’m trying to put out quality work; | they’re trying to save money. I feel, this is a dead-end job. / don’t see much of a future here.”
– said Mr. Rahul, manager of the machine shop of Universal Mfg.
Ltd. a USA based Company.
Mr. Rahul had just attended the monthly performance evaluation meeting for plant department heads. These meetings had been held on the third Friday of each month since Mr. Shiv, MBA from Manchester University, had joined the Indian operations a year earlier. Mr. Rahul had just been given the worst evaluation he had ever received in his long career with Universal Mfg. Ltd. He was the most respected of the experienced i machinists in the company. Old Plant Manager had often stated that the company’s success was due to the high quality of the work of machinists like Mr. Rahul. He had been with Universal Mfg. Ltd. for many years and was promoted to supervisor of the machine shop when the company expanded and moved to its present location. As supervisor, Mr. Rahul stressed the importance of craftsmanship and told his workers that he wanted no careless work coming from his department.

When Mr. Shiv became the plant manager, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisors to reduce inefficiencies and to seek cost reduction oppor-tunities. The company controller was instructed to have his staff ‘tighten’ the budget slightly whenever a department attained its budget in a given month; this was done to reinforce the plant supervisor’s desire to reduce costs. Mr. Shiv often stressed the importance of continued progress to-ward attaining the budget; he also made it known that he kept a file of these performance reports for future reference.
IDENTIFY the problems which appear to exist in budgetary control system and explain how budgetary control system could be revised to improve the effectiveness. [MTP Aug. 2018]
The budgetary control system appears to have several very important flaws which reduce its effectiveness and may cause interference with good performance. Some of the limitations are explained below.

Lack of Coordinated Goals: Mr. Rahul had been led to believe high quality output is the goal; however it now appears that the goal is low cost. Mr Rahul exactly does not know, what the goal are and thus cannot make decision which lead toward reaching the goals.

Influences of Uncontrollable Factors: The actual performance relative to budget is much influenced by uncontrollable factors i.e. rush orders. Thus, the variance reports serve small purpose for evaluation of performance.

The Short-Run Perspectives: The budget tightening on a monthly basis and the monthly evaluation result in a very short-run perspective. This will result in inappropriate decisions.

The budgetary control system must be improve in order to correct the deficiencies as described above. Accordingly;
– An accounting reporting system must be develop by Budgetary control system, which better matches controllable factors with supervisor j responsibility and authority.
– The company’s objectives must be more clearly define by the Budgetary Control System.
– Establish budget values for relevant time periods which do not change monthly simply as a result of a change in the prior month’s performance.
The entire organization from top management to down must be educated j in sound budgetary procedures so that all parties will understand the entire process and recognize the benefit to be gained.

Budgetary Control – CA Final SCMPE Study Material

Question 7.
(Case Study) (Behavioural Aspects of Budgetary Control)
History of the Company
High Bus Tours Co. Ltd. (HBTCL) is an open top double-decker bus sightseeing company, particularly identified with its special red and cream-colored buses. It commenced operating in small town of Meghalaya in June 2017 with four buses and as of 2021 operated over 44 buses in north east region of India. HBTCL operates five routes with stops at tourist destinations. The company runs hop-on, hop-off bus tours of various hills, with one 24-hour ticket valid for unlimited journeys on the route.

Budget Process/ Incentive Plan
As a part of management performance control and incentive scheme it has been following participative budgeting approach. In HBTCL,
budgeting is a joint process in which functional divisions develop their plans in conformity with corporate goals for the next financial year. Based on these plans, divisions prepare functional budgets and send to the appropriate management for review and approval. The budgets after the incorporation of the feedback and suggestions received from the said management, are finalised for the implementation. Then, finalised budgets are used as yardstick for performance measurement. Comparing the actual performance with the yardstick, bonus and other performance related incentives are considered. The higher management believe that this performance control and incentive scheme is very helpful to measure the performance and fixing responsibilities for the responsibility centres.

Revenue 1,13,800
Variable Costs-
Direct Material (Fuel, Lubricants and Sundries) 13,600
Direct Labour 40,500
Variable Overheads 7,700
Fixed Costs-
Operating Overheads (Buses, Garage, Salaries) 18,100
Marketing and Administration 10,700
Profit/ (Loss) before taxes 23,200

Current Year’s Income Statement (₹ ’000)

Revenue 93,500
Variable Costs:
Direct Material (Fuel, Lubricants, and Sundries) 19,600
Direct Labour 37,700
Variable Overheads 6,200
Fixed Costs:
Operating Overheads (Buses, Garage, Salaries) 20,150
Marketing and Administration 10,100
Profit/(Loss) before Taxes (250)

Other information
Surprisingly above given current year’s actual results were not up to the mark. Actual results were clearly showing adverse performance in comparison with budgeted figures.
Managers of HBTCL were upset because they did not receive the bonus.
Ms. Maggie, Tour Manager of Route No. 3, said –
“We lost 2 month’s revenue and fuel prices are almost doubled. We did our best but these circumstances were beyond our control and we should j not penalize at ail.”
In support of her statement, Ms. Meggie provided following additional information –
(a) Rain is common in Northern Region. But, the past year set a record in numbers. In July, the expected average was 1,577 mm and received was 1,810 mm, In August the expected average rain was 990 mm and actual received was 1,535 mm. Heavy rain in these two months disrupted normal life of the region.
(b) The fuel prices have risen almost continuously since last year due : to surge in global crude prices.
(c) Additional operational expenses ₹ 22,00,000 also incurred to remove the milky appearance and give the stainless a nice new look effected by heavy rain.
She claimed that –
“Revised budget with consideration of the above factors would give different results and lead to different conclusions”
ANALYSE the tour manager’s view.
Analysis of Issue
It appears that HBTCL has been badly hit by the weather – high rain in July and August have led to a slump in business. Revenue have seen a fall of 18% over the budgeted figure. Direct Material (most of the fuel) is 21% of the Sales (compared to 12% of budgeted level) because of hike in fuel price. Variable Overheads are almost same. However, interestingly, there is a saving of ₹ 1,50,000 in Operating Overheads as compared to the budgeted figure after catering additional Operational Expenses of ₹ 22,00,000 (for removal of milky appearance etc.). Furthermore, there is reduction in Marketing & Administration Cost, The ratio of Salary to Sales rose to 40% in 2021 from 36% (as budgeted). This appears to be atypical. Instead, there I should be a cut in this ratio due to slump in business.

Award of bonus in case of losses is not justified and managers should be I held accountable for their operations. However, they should not be held accountable for the events beyond their control. A manager cannot control movements in fuel price, yet he/she is supposed to have the most information and he/she is expected to correctly forecast movements in the prices of fuel. Managers shouldn’t be penalized for the uncontrollable events.
Accordingly, in HBTCL, there should be revision in the budget to account uncontrollable events. Refer Table-3.

Revised Budgeted Income Statement (₹ 000)

Revenue* 94,833
Variable Costs-
Direct Material** (Fuel, Lubricants and Sundries) 19,879
Direct Labour 33,750
Variable Overheads 6,417
Fixed Costs-
Operating Overheads (Buses, Garage, Salaries) 20,300
Marketing and Administration 10,700
Profit/ (Loss) before taxes 3,787

*10 months revenue; ** at actual pr ice levels
The Revised Profit Margin has come down to 4% as against the Target Profit Margin of 20%. This clearly indicates that the performance was benchmarked against the higher target. If original budget figure is used to j measure the performance, it will punish employees for the reason which are beyond their control.

HBTCL is not too far away from Revised Profit Margin. Therefore, at least 1 some bonus may be considered to be awarded to the employees which may create more employee loyalty and may be beneficial for long-term.

Further, continuous monitoring of Budget Performance (achievement/ 1 failure) in HBTCL is essential to overcome this situation. This helps to l identify where revisions are required in the budget to account changing | conditions, errors, modification to company’s plan etc. Monitoring of Budget Performance should be the responsibility of the managers in HBTCL. The essence of the effective monitoring of Budget Performance is that the managers should provide accurate, relevant, actionable information on time to the appropriate management level so that budget can give a realistic target to measure the performance.

It is also important to note that at the time of revising the budget, the primary budget as well as past information should not be ignored as they are the basis for preparing all budgets.

Budgetary Control – CA Final SCMPE Study Material

Question 8.
(Case Study)(Competitive Advantage and Budgetary Control System)
Dream International is a major airline operating from India. It is the biggest airline operator within the domestic airline segment and is a well-established player in the international airline segment. Except for a period of few years as outlined below, Dreams International has been operating for the last 3 decades in a segment that caters primarily to the business and premium segment travelers. On its international routes and certain long distance, yet busy domestic routes, the airline offers full service on-board. The ticket price includes on board entertainment, transfer of baggage between flights, more leg room, option to upgrade from economy to business class seats, meals, and beverages etc. Baggage allowance is liberal with each flyer being allowed 2 checked in baggage and a cabin baggage. A tag line in its advertising goes “GRAB YOUR BAGS, THEY FLY FREE”. In the domestic segment/ the airline operates across major metro cities and certain other tier-2 cities. International flights operate only from these major metro cities.

Indian aviation industry has been growing exponentially in the recent years due to a thriving economy. Consequently, there have been many new entrants in the domestic segment, offering low-cost fares to customers. These airlines have been offering tickets at huge discounts, thereby attracting a sizable chunk of customers away from Dreams International. To counter this and maintain its market share, Dreams International also followed suit. For a period of five years, tickets on various domestic routes were offered at low competitive price. At the same time, low fares can be offered only if it is profitable to do so. Therefore, certain cost management measures were undertaken. Dreams International converted to a “no-frills” airline on most of the domestic routes. Now a ticket covered only the cost of the seat and 1 checked in baggage and 1 cabin baggage. Going further, baggage allowance was reduced to economize on space and fuel requirements. To avail any other facility, the flyer wanted had to purchase extra. Another measure taken was to offer last-minute deals of tickets at a heavy discount if the flight is not fully occupied. Vacant seats are “perishable”, therefore instead of letting them go empty, the flight can be filled at cheaper rates. This yield management measure based on capacity utilization was expected to increase market share and subsequently the airline’s revenue. Tickets could be booked online using the internet rather than through ticket kiosks maintained by the airline at various locations in selected cities.

In order to quickly respond to a competitor’s move, the pricing and marketing staff were given sufficient autonomy to make this price war work. Therefore, in many situations, decisions could be taken even without the prior approval of the top management. Meanwhile adding to the stiff competition, fuel prices have been soaring in the last few years. Maintenance of aircrafts, staff compensation and other overheads have also been increasing. Landing fees in major airports have increased manifold due to congestion and limited slots on account of multiple airline operators vying for limited slots.

Given this scenario, after 5 years of operations, the management at Dreams International found that they were not able to generate sufficient profits on many of the domestic routes. A price discount by a competitor had to be matched with a similar price discount by Dreams International and vice versa. Offering last minute deals to fill up capacity did not generate additional revenue. The volume of last minute flyers was low. It was found that most flyers booking at the last minute were anyway “price indifferent”. Had the deals not been offered, the flyer would have been willing to pay more money anyway to use the airline. Therefore, neither did these deals generate extra customers nor extra revenue.

Dreams International has always been perceived to cater the premium segment traveller, therefore participating in this price war had been contrary to its image of a premium quality airline. This left a section of the customers confused about the product offering. Therefore, the management of Dreams International decided to discontinue its discount pricing strategy and exit the “low cost” airline business. The tickets are now being offered at its usual “full service” rates. This strategy is proposed to be followed for both current and prospective projects and operations.

The government has been formulating policies that are aimed at changing the landscape of the aviation sector. Airports are being built in smaller cities and towns that until date did not have one. This will improve connectivity within the country. It will increase air traffic as the public now has an alternate means to travel other than road and rail transport. Instead of flying between two small airports directly, Dreams International proposes to develop a model where flyers from smaller towns are connected to one of the major metro cities which will serve as a main hub. For Dreams International, the cost of operations will be lower as compared to flying point to point between the two small airports. For the passengers, better connectivity and more route options will be available. For example, a flyer from a smaller city, wanting to go to a destination abroad can now reach the nearest hub by flying with Dreams. From the hub, Dreams International can fly the passenger further to the desired destination abroad in its international fleet. For the flyer, this is a better alternative as compared to reaching the hub by say road transport. For Dreams International, the proposition broadens its customer base. To this effect, Dreams International is already scouting the market for smaller aircrafts I that can be operated more economically on the hub-spoke route. Also, it is in talks with for partnership with other airlines, hotels, car rentals in order to offer attractive holiday packages to customers. Since most of the other airlines do not have the scale of operations to achieve the “hub-spoke” model or the ability to offer holiday packages, Dreams International identifies this as a unique proposition that it can offer its customers. This time the proposed tag line for its advertisement would be “DREAMS TO FLY ANYWHERE, ANYTIME”. Also, Dreams International proposed to increase the turnaround time of flights for better capacity utilization.

Ticket booking is still offered over the internet. In the past, customers like this option due to the convenience it offered. Dedicated customer service lines available 24 × 7 to resolve issues is proposed.

The management of Dreams International wants to have a seamless implementation of this project. This could be a game changer for the company that will help it consolidate its position in the aviation industry.

Therefore, a meeting has been called to discuss critical reporting that needs to be in place that ensures a successful launch.
(i) EVALUATE the strategy adopted by Dreams International in becoming a “no frills” airline.
(ii) IDENTIFY the strategy adopted by Dreams International for the proposed project.
(iii) The entire strategy of Dreams International for the proposed project depends on information available about the future outlook in the industry. RECOMMEND guidelines to the management to put in place a control reporting mechanism that can enable Dreams International to take preventive measures to avoid errors in its strategy.
(iv) In its previous venture, it took 5 years for Dreams International to decide to exit the “no frills” airline operations. To avoid a delay in taking such decisions, RECOMMEND guidelines to the management to put in place a control reporting mechanism that can enable Dreams International to correct its errors and make changes in its operations in a more timely manner. [RTP May 2019]
(i) Dreams International is a premium segment airline charging “full service” rates for its ticket. However, due to intense competition in the domestic market, it adopted a “low-cost advantage” strategy. Low- cost advantage or cost leadership was achieved through following measures:
(a) Becoming a “no-frills” airline, where the ticket included only the seat and 1 each of cabin and checked in baggage. All other facilities had to be purchased extra.
(b) Baggage allowance reduced to economize of space within the flight and save on fuel costs.
(c) Online ticket booking facilitated so that the number of ticket kiosks maintained by the airline were reduced.”

Cost leadership enabled it to offer “low cost” fares to the customers that was generated through (a) giving huge discounts on ticket prices and (b) yield management of ticket price based on capacity utilization of the flight. Although, due to its long-standing image as a premium airline, the transformation to a “no frills” airline could have caused confusion about the product offering in the minds of discerning traveller, who expect higher service quality. This could have eroded the customer base in this segment.

This “Low-cost advantage” strategy did not work due to the following reasons:
(a) Price war from competitors reduced the ticket prices to levels that were unviable to Dreams International.
(b) Variable prices to fill up flight capacity worked against the airline, since it was found that these flyers, due to their immediate need, may have willing paid a higher price for the ticket than what was offered as part of the deal. These flyers were “price indifferent” which should have been used to Dreams International’s advantage and not against it.
(c) Costs of operations including fuel prices, aircraft maintenance, staff compensation, overheads such as landing fees had been rising in the recent years.
(d) Due to the above reasons, Dreams International’s venture as a low-cost airline became unviable.

(ii) Dreams International plans to foray into offering its service to flyer from smaller cities. This time it has adopted a “differentiation advantage” strategy. It is marketing in the following ways as being different from its competitors:
(a) Offering a “full service” price where high quality facilities are provided to the traveller. Facilities offered ranging from on flight meals and entertainment, better seating options, liberal baggage allowance and transfer facility etc. differentiate Dreams’ airlines from its “low cost, no frills” competitors.

(b) Ability to offer more connectivity to flyers as compared to other airlines using its unique “hub-spoke” model. “Dreams to fly anywhere, anytime” is a catchy line to present this concept to potential customers.

(c) Ability to offer vacation packages due to strategic tie-ups with other airlines and hospitality providers like hotels, car rentals etc.

(d) Product differentiation can also be made between the road and rail transport providers. It can be based on relative facilities offered and better connectivity, if not based on relative cost of travel.

(e) Dedicated customer service lines providing support to customers to resolve issues.
Superior quality, customer responsiveness and innovation will enable Dreams International to consolidate its position in the industry in the long run.

(iii) Management Control Report – Feed-forward Control Report
Management control is required to set performance measure to determine if the desired objectives of the company are being achieved or not. Control is required at every stage before the activity commences, while the activity is being performed and after the activity has been completed. Accordingly, control reports generated could be Feed-forward reports (prior), concurrent reports (during) and feedback reports (after).

When the management of Dreams International wants to have a reporting system that enables to take preventive measures, it would need to have a “Feed-forward” control. This control will help measure the error before it actually takes places. Preventive measure can then be taken to change the operational variables to achieve the desired result. Guidelines to implement a “Feed-forward” control are as follows:
(a) Through planning and analysis is required. In the case of Dreams International, the proposal should be planned and analysed at various levels. The strategy of selection of appropriate routes, “full service” pricing, strategic partnerships, financing the proposal need to be taken at a higher level of management. Decisions relating to flight operations, procurement of supplies like fuel, marketing, human resource planning etc. can be done by the management in charge of operations.

(b) Careful discrimination must be applied in selecting input variables. Planning and analysis should be done in an integrated fashion. There should be synergy in the thinking at an operational level and top management strategic level.

(c) Feed forward mechanism should be kept dynamic. Dreams International should keep a close watch on the government policies and its implementation in the civil aviation sector. Reporting may be done in pre-determined intervals say a monthly feedforward reporting can be decided upon. Changes to plans should be made in a timely fashion to make them relevant.

(d) A model control system should be developed. Authority and responsibility for various functions need to be determined and clearly defined while developing this model.

(e) Data on input variables should be collected regularly. For example, Changes in fuel prices, which form a large share of expenses, have to be tracked continuously. If the prices are expected to fluctuate widely, hedging options or long term price agreements with suppliers can be considered.

(f) Feed-forward control requires action. At the time of implementation, the control model developed should be followed in order to establish a systematic course of operations.

(iv) Management Control Report – Feedback Control Report
These are control reports that provide feedback about the operations. It tracks the actual results with the budgeted/forecasted results. These reports in themselves do not cause a change in performance. The management has to take timely action to correct the errors and change its operations, if required.
Guideline to implement this reporting system are as follows:
(a) Feedback report should disclose both accomplishment and responsibility. As discussed in the feed forward report, Dreams j International would have already put in place an organizational structure defining individual authority and responsibility. [ Performance should be tracked accordingly, so that individual performance can be assessed.

(b) Feedback reports should be extracted promptly. The management has to decide the interval at which these reports need to be generated. The interval should be such, that changes required can be assessed and action can be taken in a timely manner. In the previous instance, Dreams International had given autonomy to the marketing and pricing division to take decisions to meet the competitor’s actions. It took five years to determine that the project was unviable. However, a timely reporting mechanism such as a feedback report should have been in place to appraise the top management about the decisions taken. This information would have enabled the top management to make an earlier assessment as to the viability of “no frills” airline.

(c) Feedback reports should disclose trends and relationships. Trends could be customer travelling preferences, deals offered by competitors or other changes in flight operations. Relationships f could be supplier relationships, customer relationships, strategic partner relationships etc. Information generated from all these i areas should be collated in order to provide proper feedback to the management.

(d) Feedback reports should disclose variations from standards. These standards could be from financial budgets or from non-financial metrics identified as key performance indicators. For example, delay in flight operations could be a non-financial metric that can be tracked against an expected standard set in the planning stage. The information metric for actual operations should be assessed in the same manner with which the standard was set. For example, a flight delay in operations could be a delay in arrival beyond 15 mins. This same standard should be used to assess actual performance.

(e) Feedback reports should be in a standardized format. It should be easily understood and well presented to the management, Facts should be stated without ambiguity and in a standard manner.

Budgetary Control – CA Final SCMPE Study Material

Question 9.
(Participation in Budget Setting Process)
KNOW, a leading management school is in the heart of India’s financial center Mumbai, preparing its budget for 2021. In previous years, the director of the school has prepared the budget without the participation of senior staff and presented it to the school board for approval.
Last year the KNOW’ board blasted the director over the lack of participation of his senior staff in the budget process for 2020 and requested that for the 2021 budget the senior staff were to be involved.
LIST the potential advantages and disadvantages to the KNOW of involving the senior staff in the budget preparation process. [MTP March 2018/2019] (10 Marks)
There are potential advantages and disadvantages of the involvement of staff in the preparation of the budget.

Potential advantages:
(a) Senior staff may agree to accept the targets because they would take ownership of it as their budget. For not achieving budget expectations, senior staff cannot blame unrealistic goals as an excuse.

(b) Senior staff may have a better understanding of what results can be achieved and at what costs. For example, they may have a better knowledge of individual courses and how they may be delivered more efficiently and cost effectively.

(c) Senior staff would feel that they are being appreciated for the value that their experience brings to the running of the management school.

(d) Senior staff may get the opportunity to discuss organisational issues, in which an exchange of information and ideas can help to solve problems and agree future actions.

Potential disadvantages:
(a) Senior staff may be excellent academically but could lack the practical knowledge which is require to formulate their budget.
(b) Senior staff may consume a great deal of time arguing with each other
(and with the school director).
(c) Senior staff may limit: the benefits of participation due to personality traits of participants.
(d) Senior staff may decide among themselves to manipulate and artificially inflate the proposed budget so that it is easier for them to achieve the cost targets they have set.

Question 10.
(Case Scenario) (Participation in Budget Setting Process)
Xylem Woodcraft Private Limited (XWPL) is one of the distinguished manufacturers and suppliers of an unlimited array of Wooden Furniture Items, established in the year 1997. Product compilation comprises of Modular Furniture, Workstations, and Cafeteria Furniture. Moreover, it is also engaged in presenting Furniture Services that include Interior Fit Out, Office Interiors and Corporate Interior Designing. Since inception, it has strived to proffer an excellent blend of optimum quality and price, and successfully established the company as the preferred choice of customers in the past years. This is the reason that its products and services are applauded in the industry for its flawlessness.

At XWPL, a world-class infrastructure is set up with different types of latest technology based machines and equipment, which provide great support in hassle-free production and storage of the proffered assortment. Besides the spacious workspace, it has recruited a team of skilled and experienced professionals, who are magnificently trained to understand and meet the diverse client requirements within the committed time period. It aims to attain complete client satisfaction and put in its best efforts to achieve the same by offering outstanding product range & feasible services.

XWPL’s Budgeting Process for Sales
(i) Each salesgirl makes a customer-wise listing of sales for the last few years. Based on this information and her knowledge about customer’s requirements, she determines an overall sales goal.
(ii) The sale manager, W Robert, gathers all this information and modifies it a bit. Particularly, W looks at variance in sales growth and modifies low projections to be in line with the average. He, of course, discusses this correction with the concerned salesgirl. The usual approach is to hold up the other forecasts and attribute lack of sales growth to lower talent.
(iii) W then meets with Donald, Managing Director. By this time, already back out of his sales expectations for next year based on his desired profit. discusses the overall target with the W. The usual result is a 7% to 10% increase in projected sales, which the W allocates among the salesgirls based on their past performance.
(iv) Of course, desires that the W discuss and negotiate any alteration with the sales force. He believes that with appropriate logics, not high but attainable targets for his sales team can be met.
(i) Discuss the participative nature of the sales budgeting process at XWPL.
(ii) Advise on best approach from XWPL’s perspective that may be adopted. [MTP Oct. 2000]
(i) In participative budgeting, subordinate managers create their own budget and these budgets are reviewed by senior management. Such budget communicates a sense of responsibility to subordinate managers and fosters creativity. This is also called bottom up approach (sometime referred as participative approach).

The participative budget described here appears participative in name only. In virtually every instance, the participative input is subject to oversight and discussion by sales manager. Some amount of revision is also common. However, excessive and arbitrary review that substitutes a top-down target for a bottom-up estimate makes a deceit process. Such a gutting appears to be the case in XWPL. J’s statement
indicates a very autocratic style. The revision process also seems to be arbitrary and capricious. There is little incentive for the salesgirls ;I5 to spend much time and effort in projecting the true expected sales because they know that the target would be revised again and J’s estimate will prevail. This situation creates an interesting discussion about the costs and benefits of participative budgeting and gives rise to game playing and slack.

As the subordinate manager creates the budget, it might be possible that the budget’s goals become the manager’s personal goal, resulting in greater goal congruence. In addition to the behavioural benefits, participative budgeting also has the advantage of involving individuals whose knowledge of local conditions may enhance the entire planning process.

(ii) In top-down approach, budget figures will be imposed on sales personnel by senior management and sales personnel will have a very
little participation in the budget process. Such budget will not interest them, since it ignores their involvement altogether. While in bottom-up approach, each sales person will prepare their own budget. These budgets will be combined and reviewed by seniors with adjustment being made to co-ordinate the needs and goals of overall company. Proponents of this approach is that salespersons have the best information of customer’s requirements, therefore they are in the best position in setting the sales goal of the company. More importantly, salespersons who have role in setting these goals are more motivated to achieve these goals. However, this approach is time-intensive and very costly when compared with top-down approach. In order to achieve personal goals, participants may also engage in politics that create budgetary slack and other problems in the budget system.

Since both top-down and bottom-up approaches are legitimate approaches, so XWPL can use combination of both. Seniors know the strategic direction of the company and the important external factors that affect it, so they might prepare a set of planning guidelines for the salesgirls. These guidelines may include forecast of key economic variables and their potential impact on the XWPL, plans for introducing and advertising a new product and some broad sales targets etc. With these guidelines, salesgirls might prepare their individual budget, These budgets need to be reviewed to validate the uniformity with the XWPL’s objectives. After review, if changes are to be made, the same should be discussed with sales girls involved.

Budgetary Control – CA Final SCMPE Study Material

Question 11.
Suzur Motor Ltd., a car manufacturing company is recently planning to schedule a meeting of board of directors in next twelve days. ; As per agenda, one of the point of discussion of the meeting is the present budgeting system of the company.

Suzur Motor Ltd. at present using budgets for control which are prepared mostly on traditional basis. The CEO Mr Rakesh of the company wants to propose to the board of directors to use Beyond budgeting instead of traditional budgeting in the organization on experimental basis. Therefore you as the management accountant has been asked by your CEO. Mr Rakesh to explore the possibilities of introducing Beyond Budgeting (BB) system in the company.
You are specifically required to PREPARE notes to your CEO to be used for his presentation at the meeting on:
(i) the major limitations of traditional budgets.
(ii) the advantages available in Beyond Budgeting.
(iii) the nature of Beyond Budgeting.
(iv) the benefits that can be enjoyed from Beyond Budgeting.
(v) the suitability of Beyond Budgeting to the company. (10 Marks) [Nov. 2018] (10 Marks)
(i) Limitations of Traditional Budgets

  • It is Time-consuming and costly to put together.
  • It often creates barrier to changes.
  • Constrain responsiveness and flexibility.
  • Add little value, especially given the time required to prepare.
  • Rarely strategically focused and are often contradictory.
  • It is developed and updated too infrequently, usually annually.
  • It Concentrate on cost reduction while it ignores the value creation.
  • It is based on unsupported assumptions and guess work.
  • It make the people feel undervalued.
  • It strengthen the departmental barriers rather than encourage knowledge sharing.

(ii) Advantages of Beyond Budgeting (BB)
BB identifies its two main advantages.

  • BB is a decentralized process, despite traditional budgeting where leaders plan and control organisations centrally.
  • BB is more adaptive process than traditional budgeting.

(iii) Nature of ‘Beyond Budgeting’

  • In BB, Budgeting is evolving, rather than becoming obsolete – it depends on trust and transparency.
  • Shift from the top-down, centralised process to a more participative, bottom-up exercise in many organisations.
  • Beyond Budgeting highlights the level of improvement that can be achieved even with relatively simple modifications and a great deal of trust.
  • In Beyond Budgeting, Budgeting has changed, the change has been neither dramatic nor radical. Instead, incremental improvements, with traditional budgets being supplemented by new tools and techniques. Forecasting is in fact more important.

(iv) Benefits of the ‘Beyond Budgeting’ Model

  • BB helps the managers to co-ordinate their work to beat the competition, which further help to reduce internal rivalry between managers as target shifts to competitors.
  • BB helps to motivate individuals by defining their clear responsibilities and challenges.
  • BB eliminates some behavioural issues by making reward team- based.
  • BB involves proper delegation of authority to operational managers who are close to the concerned action and can react quickly.
  • While following BB operational managers do not restrict themselves to budget limits and focus on achieving key ratios.
  • BB creates such information systems which provide fast and open information throughout the organization.
  • BB establishes customer-orientated teams.

(v) Suitability of Beyond Budgeting to the Company

  • Since Suzur. Motors Ltd. is a car manufacturing company and presently adopting Traditional Costing system. Moreover, Automobile industry goes through rapid changes in its business environment. So, the organisation should definitely use Beyond Budgeting to improve the control system and beat the competition.
  • Beyond Budgeting lies an agile, holistic approach based on self-organisation. This will also help the managers to work in f close coordination with each other with motivation which in j turn will beat the competition.

Budgetary Control – CA Final SCMPE Study Material

Question 12.
(Case Study: Beyond Budgeting)
Serene BnB is a hotel chain that has properties in popular tourist destinations. Each hotel is at least a 50 rooms establishment that has standard, elite and luxury size suites. Currently, the chain has 9 properties spread across World. Serene BnB has its corporate headquarters in Singapore, from where the senior management operate. Operations management executives are based out of each specific property that they cater to. Serene BnB is a public listed company, with majority of its shareholders being institutional investors like mutual funds, banks and insurance companies. Since these investors had a high stake in the company, they had representatives of the board of directors to govern strategic decisions. One of the strategic goals of the company for 2021, was to earn a profit of ₹ 1,500 million and keep increasing this target by 10% each year. Due to recessionary conditions, business has been volatile. Consequently, senior management is under pressure to meet the targets.

In order to have a defined plan for operations, Serene BnB prepares an annual bud get for each of the properties as well as one master budget that consolidates at a company level. There is a separate financial and business analysis team that is in charge of this exercise. Key assumptions and future expected trends are discussed at with the operations management of each property. After incorporating the corporate headquarters numbers, the consolidated budget is presented to the senior management for approval. In order to have a uniform policy across locations, key met-rics like room rent per day, material procurement for kitchen and rooms, employee hiring, capital investments at each property, advertising and promotional activities are handled directly by the corporate headquarters.

The management at each location is responsible to ensure smooth operations of the hotel chain by implementing these policies. The manager of each hotel property is given a target in terms of revenue to be generated, room occupancy and profit to be achieved. Therefore, the management at each location is also under pressure to perform and meet the target set by the senior management. In the past, if the target had not been met for couple of years, the senior management had closed down the hotel and exited the property. At the same time, best performers are given more liberal budgets to operate on. Hence, competition between various locations has always been fierce. There are constant negotiations for been given a “reasonable/practical target” that has to be achieved.

Monthly meetings are scheduled with the corporate office to explain variance of results from the budget. The recent monthly results have shown that 7 of the 9 properties have consistently not been able to meet the targets in the past six months. The situation is confounded because the tourism industry has been affected greatly by recessionary trends in the global economy. Therefore, the footfalls at the regular tourist places, where the hotel has properties, have reduced considerably. In some places occupancy during peak season has only been 60%. Therefore, operations are bleak and uncertain. At these meetings, the operations management argue that due to this dynamic scenario, the budgeted targets set become obscure since they are not based on the current circumstances.

The corporate office has met with the operations management at each of these properties in order to understand the situation better. Discussions have taken place about how the business can be improved. Few of the suggestions to improve performance are:
(1) When the hotel is not fully booked, especially during off-season, give manager at each property the authority to rent out rooms at
an attractive discount. These opportunities have to encased quickly, therefore the decision about the rate would be better handled by the personnel at the hotel. A guideline on the discount policy can be worked out with the corporate office. This will ensure that room occupancy rates increase, while earning reasonable return.
(2) Allow for procurement of kitchen supplies locally, rather than buy-ing it only from specified authorized vendors. Not only will this be cheaper, it also allows for moderate flexibility with the kitchen menu that can cater to customer demands based on current availability of supplies. Prior approvals can be taken by the management from the quality control department to ensure that customer satisfaction does not suffer.
(3) A monthly reward and recognition program for employees, based on their service record for the month. Recommendations can be from fellow employees or the location manager.
(4) Allow the location management autonomy, with a reasonable budget to cater to purchasing equipment. In order to address certain urgent requirements or repairs, quick response from the operations management is needed. The current process of getting approval the corporate office is cumbersome since it takes a longer time. Autonomy can help address these issues quickly without much damage done to customer satisfaction. Funding can be quickly procured from banks if required.

Based on these discussions, the senior management has decided to decentralize all of the above decisions. As a pilot project, they have decided against preparing a line-wise detailed budget (sales budgets, operations cost budgets, advertising etc.) for each location. Instead the operations management will be given clear targets at each of the locations regarding the key profitability ratios, liquidity ratios and leverage ratios, as also guidelines on market share, quality and customer satisfaction. These benchmarks have been finalized based on industry research of peer group companies. However, the managers have the autonomy to achieve the expected target based on their individual business scenarios at each location. The focus is therefore not on achieving budget numbers that have been finalized. Instead management gets growth targets to achieve. One year after implementing this decision, it was found that company was able to meet the shareholders’ expectations, have a robust growth and an energetic employee morale.
(i) DISCUSS the traditional budgeting process had a negative impact on Serene BnB’s operations,
(ii) EXPLAIN the philosophy behind “growth based targets” instead of “budget based targets”. [RTP Nov. 2018] [20 Marks]
(i) Serene BnB is operating in a business environment that is highly competitive and dynamic. Focus of the traditional budget of organisation was driven towards achievement of the company’s strategic goal, which was profit target of ? 1,500 million for the year 2021. Accordingly, the senior management followed a top-down approach to budgeting. Most important policy decisions like room rent per day, material procurement, employee hiring, capital investments at each property, advertising and promotional activities are handled directly by the corporate headquarters. Management in charge of operations at each location only implement it. In a changing business scenario, this budgeting methodology has the following shortcomings:

Budgetary Control – CA Final SCMPE Study Material

(a) Budgets based on these policies may not be flexible enough in a fast-changing business environment. Although it is based on assumptions and expectations of the management has made about the business growth, in a dynamic scenario, it is very difficult to predict the future accurately. Therefore, targets or benchmarks set by the traditional budgets may become outdated quickly.

(b) These budgets were based on business functions like sales, advertising, operations etc. While a strategy for these functions is important, they are based on internal benchmarks and assumptions made by the management. However, for the company to be flexible in a changing environment, the focus should also be on external factors.

(c) The management aims to make a yearly profit that is 1096 more than the previous year’s profit. If previous year profit alone is the benchmark for growth, certain decisions may be shelved because they may decrease current year’s profits below target. However, had these decisions been implemented they may have generated value in the long term and ultimately may have been better for earning profits in future years. For example, certain capital expenditures that may need to be undertaken quickly in order to improve customer satisfaction, may not be incurred at all simply because there is no budget for it.

(d) Operations management did not have much autonomy since policies were controlled at the corporate headquarters. At the same time, they were responsible for achieving the targets set out as per the budget. Responsibility without authority creates a negative working environment. Consequently, it might be difficult to retain talented personnel.

(e) In order to meet budget targets, managers may try to negotiate for lower sales targets to achieve, more budget allocations to meet costs etc. This does not foster positive business growth. Managers are more intent in meeting targets rather than focusing | on business growth. It leads to lower sales than can otherwise be achieved and leads to protection of costs rather than working j towards lowering operational costs.
It can be concluded that the traditional budgeting process was more inward looking. Focus is on achieving budget target rather than implementing strategies that can create more value to the company.

(ii) Following feedback from operations managers, the management given j them targets based on growth instead those based on the budget alone. This is the philosophy of “beyond budgeting”. Below are features of this philosophy that has enabled Serene BnB to achieve better results:
(a) It is a more decentralized and participative way of operating a business. Rather than being made responsible for business decisions, which were not in their control, the employees delegated responsibility, combined with the necessary authority to execute decisions.

(b) Operations management and the personnel at each location are capable of quickly adapting to changing market scenarios. Likewise, since they interact with the customers directly, it enables them to make quicker decisions to ensure customer satisfaction j or identify opportunities to generate more revenue.

(c) Targets are based on performance of peer group companies, Benchmarks based on peer group performance will be unbiased and reflects the current business scenario better. Due to this, customer’s needs and satisfaction automatically gets priority. It is the customers who ultimately drive business growth. Therefore, rather than having an inward-looking outlook, focus is shifted to the external market conditions. Due to autonomy, managers at various locations need not compete with each other for budget allocation. This channelizes the operational focus to meet challenges from outside competitors rather than having detrimental competition within the organization. At the same time, the targets for the company are also based on guidelines from the corporate office. Therefore, there is congregation of goals with the shareholders’ expectations.

(d) Employee morale is also boosted due to the monthly reward and recognition system. It fosters healthy competition among employees.
Since the focus is on growth, beyond budgeting can be a way of achieving better results in challenging business environment.

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