Chapter 3 extract from our ExPress notes for
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Notes
CIMA Paper P2
Management Performance
For exams in 2011
CHAPTER 1
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ExPress Notes
CIMA P2 Performance Management
CHAPTER 3
Budgeting and Management Control
START
The Big Picture
Responsibility accounting
A system of accounting that attributes costs and/or revenues to individual business units
(responsibility centres) for which a particular manager is held responsible.
KEY KNOWLEDGE
Alternative budgeting models
The strengths and weaknesses of the various models in existence should be considered:
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ExPress Notes
CIMA P2 Performance Management
Fixed

A fixed budget is not adjusted to the actual volume of output (activity level)
Flexible vs. Flexed
The distinction is sometimes overlooked:
 Flexible: designed to change according to actual volumes of output; usually done
before the start of the budgetary period as a sort of scenario planning;
 Flexed: This is done “after the fact” and is based on the actual level of activity
achieved.
Rolling
A rolling budget is one which is revised on an on-going basis by comparing actual results
with the original budget when one period has expired, while simultaneously adding a new
period to the budget period.
EXAMPLE
An annual budget which is kept rolling on a quarterly basis, for example, may start with an
(original) January – December forecast. At the end of March, the entire budget is revised on
the basis of the first quarter, and a new set of forecasts relating to April (current year) –
March (next year) are prepared, i.e. always with a 12 month range into the future.
Zero-based (ZBB)



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Each year, budget owners must justify the entire budget (build it from zero)
At odds with incremental budgeting (where only changes need justification, hence
encouraging the “spend it or lose it” mentality)
A three-step approach to ZBB:
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
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ExPress Notes
CIMA P2 Performance Management
o
o
o
Define “decision packages” (i.e. activities that result in costs or revenues),
distinguishing between “mutually exclusive packages” (alternative activities to
achieve the same result) and “incremental packages” (base level of input needed
+ additional inputs)
Evaluate and rank packages (based on the benefit to the organisation)
Allocate resources across packages, considering ranking and seniority of
responsible managers
Activity-based (ABB)

No budget owners (departments, functions), but budgeted activity cost (ABC costing)

Budgeted activity cost = demand for activity * unit cost of activity

More detailed and accurate than traditional budgets, especially regarding indirect
costs
Incremental
Such budgets are based on what went on during the period before. Typically, this approach
results in modest changes and adjustments to the earlier budget. At worst, they retain and
perpetuate inefficiencies and old assumptions. This might be termed the “lazy man’s
budget”.
Behavioral aspects of budgeting
Budgetary control systems seek to monitor performance against the budget in a timely way
so that deviations can be identified and rectified. The system can only work as well as the
care and thought that went into defining performance targets to be measured, and the
incentives (and sanctions) that follow from achievement (or not) of those targets.
Budgets are prepared, implemented/managed and reviewed by people. The following
aspects concerning human behavior need to be borne in mind:

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Goal congruence at all levels of the organization – corporate, divisional and individual
– must exist for a budget, and its attendant control systems, to be effective. A lack
of congruence leads to organizational dysfunctionality.
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
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ExPress Notes
CIMA P2 Performance Management

To be motivating, budgets/targets should be set at a challenging – but not an
impossible – level. If they are too easy to achieve, then organizational/individual
complacency result.

Participation in the preparation of a budget can be motivating and secure the “buyin” (i.e. commitment) of the employee.
Problems frequently encountered when using conventional budgets:

They invite “gaming” of the system;

They can be inflexible;

They are often imposed from the top – “Top Down”;

There is an indirect connection with the company’s strategy;

They are used for too many different purposes;

They reinforce a centralizing tendencies in the company

There is a lack of goal congruence between corporate, divisional and individual
goals
Key metrics
The traditional financial measures used in tracking performance should be familiar; these
include:
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
Profitability ratios,

Liquidity ratios; and

asset turnover ratios.
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other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
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ExPress Notes
CIMA P2 Performance Management
What-if analysis
This refers to the process of testing different scenarios regarding volumes, prices and cost
structures within a financial model in order to observe the financial consequences of
alternative strategies.
The use of excel spreadsheets is indispensable in facilitating such analyses and their use is
considered a basic working tool for all management professionals.
The scope of performance measurement
KEY KNOWLEDGE
Balanced Scorecard
The balance scorecard addresses a number of parameters (or “perspectives”) in monitoring
business performance by asking the following questions:
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
Financial perspective: “To succeed financially how should we appear to our
shareholders?”

Customer perspective: “To achieve our vision how should we appear to our
customers?”

Internal business processes: “To satisfy our shareholders and customers what
business processes must we excel at?”

Learning and growth: “To achieve our vision how will we sustain our ability to
change and improve?”
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com