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Section C Mock Exam Answers

31 Sauce Co

a) On the Company
The production schedule is drawn up using Anticipated Sales as the base. From what we see, the managing directo
the employees as they feel like unrealistic targets are being set for them by someone who does not value their opi
in anticipation of mass production occurring, it is possible the company has hired too many employees. If the com
which would traditionally lessen inventory holding costs - however, the targeted sales volume would be equivalent
more goods than necessary and is carrying it forward. These inventory holding costs and high labour costs will furt
Managers would then be inclined to reduce these inefficiencies and would pay less attention to the quality of the
would further increase the inventory holding costs.

On the Employees
As stated earlier, the managing director is the sole budget setter. This is one of the many reasons why the employe
targets have been set too high for them to achieve. As such, an imposed style of budgeting will negatively affect st

b) The controllability principle states that departmental managers should be given responsibility over their respective
control over. This principle should be practiced if a company implements a bottom-up budgeting style, otherwise m
influence over. The information required for a decision should also be available to a manager, or they will take dec

In Sauce Company's case, managers would be held accountable over the inventory holding costs (which was expec
also expected due to high staff levels).

c) Advantages
Sauce Company has employed new and inexperienced staff. It is also likely that departmental managers were repla
New employees in general are quite inexperienced. Incremental Budgeting is a perfect budgeting system for a com
with no accounting experience may prepare one. Furthermore, this budgeting technique is quick. It does not requ
the managers' time. They cannot budget, implement the budget that hasn’t been prepared yet and contol the org

Disadvantages
Incremental Budgeting allows for inefficiencies to be carried forward to the next budget period. Sauce Co may hav
encourages these inefficiencies. The company may have uneconomic processes which consume a lot of cash, and
would be best.
In addition, this budgeting technique allows for wasteful spending and budgetary bias/slack. It builds in allowance
comprehensively. Departmental Managers may spend the entire budget in this budget period so that the same am

32 Brace Co

a) The Balanced Scorecard approach is a performance measurement model used by companies that require objective

There are 4 perspectives to the Balanced Scorecard model:


Customer
This aspect measures customer satisfaction rates, customer retention rates, quality ratings, number of inspections
well as old. The customer perspective is closely linked to the revenue/profit perspective, i.e., if the customer persp
Internal
The internal perspective considers the processes the company currently excels at, and identifies which processes t
continual improvement.

Financial
This perspective questions the company's actions in relation to improving, or maximizing, its shareholder return. It

Innovation and Learning


The Innovation and Learning aspect asks the company if it is offering any new products or services to its customers
and services, so are likely to switch to competitors if the company is not providing anything new.

b) Sales Op. Profit Margin Net Profit Capital Employed ROI


Division A 44600 28% 12488 82800 15.08%
Division B 21800 33% 7194 40600 17.72%

The targeted Return on Investment is 16%. From this we can see that the manager of Division A is likely to decline
genuinely focuses on increasing shareholder wealth, as capital employed is currently double that of Division B's, an
at a value $230,000 higher than that of Division B's.

Based on Return on Investment, the manager of Division B is likely to accept the project, as the return on investme

The manager of Division A is correct in saying that return on investment being used as the only performance meas
the company as a whole. Using Residual Income as a tool has inclined managers towards making decisions that su
see, the managing director is the sole budget setter. These two factors are likely to adversely affect the morale of
ho does not value their opinion. Their demotivation further causes them to stray from their targets. Furthermore,
any employees. If the company has perishable products, then it may be operating in a JIT (Just in Time) environment
olume would be equivalent to the targeted production volume. It is possible that the company has manufactured
high labour costs will further affect profits.
ntion to the quality of the goods they produce, and this would result in low ratings of customer satisfaction AND it

reasons why the employees feel demotivated. They may think that their opinions are not valued and that the
ng will negatively affect staff morale.

ibility over their respective departments, and their performance should only be assessed over the costs they had
udgeting style, otherwise managers will feel demotivated for being assessed based on results they could not exert
ager, or they will take decisions based on inaccurate information, or the lack of any information at all.

ng costs (which was expected, since the targeted sales volume was unrealistically high) and overtime (which was

ental managers were replaced since the targets were not achieved, even if the targets set for them were too high.
udgeting system for a company with new employees, as it is simple, quick and cheap to prepare. Any individual
e is quick. It does not require much time. Sauce Co may need time to sort out its issues which will take up much of
red yet and contol the organization yet.

period. Sauce Co may have many inefficient operations that may need to be reviewed. Incremental Budgeting
onsume a lot of cash, and the benefit received may not be enough. For this reason, a Zero Based Budgeting style

ack. It builds in allowance for unecessary expenditure and does not question department functions
eriod so that the same amount is carried forward for the next period.

anies that require objective and unbiased results to be reached on all aspects of the company's.

gs, number of inspections done, avg time taken for deliveries, and the ratio of new customers to all customers, as
i.e., if the customer perspective is positive, then the revenue and profit perspectives are as well.
dentifies which processes the company must now excel in. This aspect assists the company in making decisions and

g, its shareholder return. It therefore considers the company's profits, expenses and capital.

or services to its customers, or improving its current ones. Customers are always reeled in by innovative products

RI
2552 million
2322 million

vision A is likely to decline the offer, as their ROI is only 15.08%. However it is difficult to tell as the manager
uble that of Division B's, and profits are also quite healthy. Furthermore, their Residual Income is positive,

, as the return on investment is higher than the target. Residual Income is also healthy, which is a good sign.

he only performance measurement tool has led to a lack of goal congruence between their respective division and
s making decisions that suit the company as well as the divisions.