# A budgetary control system

Business and Finance Homework Help: Identify and explain the key objectives of a budgetary control system: (20 marks)

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Before implementing a responsibility accounting system, all areas of authority and responsibility within an organization must be clearly defined.

Required: Explain how this accomplished and why it is important. (15 marks)

If budget performance is overemphasized, myopic behavior can occur where a manager takes actions that improve budgetary performance in the short run but cause long-run harm to the firm.

Required:

Give at least two examples of myopic behavior that might be encouraged if there is an overemphasis on budgets as a performance measure. (10 marks)

Discuss ways to discourage or prevent myopic behavior in managers. (10 marks)

What are the three approaches to set at an optimum selling price of a product? Describe each of the approach with example. (15 marks)

What factors should be taken into account when pricing? (20 marks)

Solution Guideline  23:

To estimate optimum selling prices, we can use any of the following three:

Graphical analysis

Flexible budgeting

Differential calculus

(i) Plot total costs and total revenue against output and where the gap is the greatest between cost and revenue is the optimum price which maximizes profit. (5 marks)

(ii) Flexible budget prepare revenue and cost structures at various levels of output and look for the level of output which provides the greatest profit. (4 marks)

(iii) Differential calculus

The optimum output level is where marginal cost = marginal revenue

dTC/dx = dTR/dx (5 marks)

(2 marks for explanation and 2-3 marks for an example max total 15 marks)

(b) Factors to consider when setting a price:

·         Competitors’ actions and reactions

·          Suppliers: You ↑ price → Suppliers ↑ price for material

·          Inflation

·          Quality: customers judge quality by price

·          New product pricing difficult to make as lack of reference point

·          Income effects (unemployment)

·          Multiple products and loss leaders companies sell a range of products which are commonly interrelated being complements to each other or substitutes for one another.

Costs

Pricing strategy – penetration pricing (low price), price skimming(high price), price discrimination, volume discounting

Customers Demand elastic/inelastic. Greater than 1 is elastic, less than 1 inelastic

Price elastic =  % change in sales demand % change in sales price

(2 marks for each relevant point max. 20 marks)

Distinguish between the primary aims of not-for-profit and public sector entities and those of profit oriented entities.

Discuss the extent to which international financial reporting standards (IFRS) are relevant to specialized not-for-profit and public sector.

List the Objectives of the UK statement of Recommended practice (SORP) for charities.

Discuss the different approaches that may be required when assessing the performance of specialized not-for-profit and public sector organizations.

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