TUTORIAL 1: Planning, Budgeting and Controlling

Gruber (Past Year Oct 2018)

(a) Discuss the present budgeting system applied by Gruber and explain why it was preferred by the
previous management. (7 marks)
(any 7 points x 1 mark = 7 marks)

– It appears that Gruber applied a traditional budgeting system called incremental budgeting (IB)- based
on the current year’s results plus an extra amount for estimated growth or inflation next year.
– Budget justification in Gruber's system is only on increments in costs and revenues which will occur
in the subsequent year, which is usually not significant.
– IB can be an effective method of budgeting if current operations are efficient and effective
– there are no changes to the current operations, as is the case with Gruber.
– IB is relatively simple to use & easy to understand, which makes it preferred by Gruber's employees
who want less disruption to their work.
– IB budget is stable & change is gradual, reflecting Gruber's business in the past decade.
– Managers can operate their departments on a consistent basis (comfort zone).
– IB can avoid conflicts - departments seen to be treated similarly (standard rate for all).
– Easier co-ordination between department budgets (almost no coordination needed).
– Impact of change can be seen quickly (budget can be readied very fast), suitable for Gruber's where
employees prefer less disruption to their fast paced operation.

(b) Assess the effectiveness of the present budgeting system in addressing the current business
environment. (6 marks)
(any 6 points x 1 mark = 6 marks)

– Incremental budgeting (IB) fails to take into account recent changes in Gruber's industry lanscape.
Customers preferences have changed significantly.
– IB does not provide incentive for employees to develop new ideas/to innovate in meeting the changing
needs of customers.
– IB encourages the “spend it or lose it ” attitude, which discourages cost efficiency objective. IB may
be the reason behind Gruber's increasing operating costs.
– The priority for resources will have to change to meet the chaging customer needs. Hence, allocating
resources based on the past as in IB may be irrelevant.
– Budget set based on past assumptions (IB) may become outdated and can no longer relate to the level
of activity or type of work done, which would have to change in order to meet the current Gruber
customers' needs.
– Budget slack is allowed to perpetuate in IB, which is something Gruber needs to avoid as the new
management is aiming to reduce operating costs.
– Past inefficiencies will be perpetuated. This issue must be avoided in order to address the declining
profit margin at Gruber.

(c) Discuss how the use of zero-based budgeting (ZBB) can help the turnaround of Gruber.
Highlight any potential issues in implementing ZBB. (7 marks)
(any 7 points x 1 mark = 7 marks)

– ZBB avoids carrying forward any inefficiencies in past budgets into future budgets, which is what the
new management needs to address its high operating costs.
– Since all expenditures must be justified before any allocations are made, ZBB reduces the possibility
of wastages being occurring. Gruber's prvious use of incremental budgeting (IB) would have allowed
much wastes as allocations were on incremental basis.
– ZBB focuses management’s attention on priorities of achieving the overall corporate objectives.
Gruber is reviewing its priorities to meet the changing customers' needs, and ZBB will help ensure
resource allocation reflects the new priorities.
– But ZBB may lead to micro management, as every spending requires justification.
– The short-term emphasis of ZBB may lead to the detriment of long term benefits. Hence, Gruber's
management needs to ensure it does not lose sight of Gruber's long term goals.
– ZBB requires more work and the time consuming process may disrupt Gruber's fast paced operation.
– Gruber's management may lack required skills to construct the decision packages or rank the packages,
as IB has been applied in Gruber for the past decade. However, new members of its management may
have prior ZBB experiences elsewhere.
– Ranking process in ZBB may be difficult as the number of packages may be large.
– Questioning of current practices may be threatening to managers at Gruber, who have been using IB
for many years.
Safe Care (Past Year Mar 2020)

(a) Prepare a forecast of sales and costs for Quarter 3 and Quarter 4 of financial year 2020. Show
the variable costs and fixed costs separately. (15 marks)

Q1 Q2 Q3 Fcst Q4 Fcst
Units produced and sold 20,000 30,000 25,000 16,000
RM RM RM RM
Sales 10,000,000 15,000,000 12,500,000 8,000,000
Total production cost 3,330,000 4,830,000
Variable production cost 3,375,000 2,160,000
Fixed production cost 360,000 360,000
Variable selling & distribution cost 1,800,000 2,700,000 2,500,000 1,600,000
Fxied selling & distribution cost 450,000 450,000 330,000 330,000
Administration cost 302,000 302,000 302,000 302,000
Profit 4,118,000 6,718,000 5,633,000 3,248,000

High-Low method: Units Total cost (RM)

Q1 20,000 3,330,000
Q2 30,000 4,830,000
Diff 10,000 1,500,000

VC production per unit 150

Fixed production cost
TC = FC + VC 3,330,000 = FC + 3,000,000
FC = 330,000

(b) Purposes of budgeting (any 5 points x 2 marks = 10 marks): 10

(Any 5 points x 2 marks = 10 marks)
(1) For
(1) For planning,
planning, budgetingensures
budgeting ensuresmanagers
managers plan
planfor
forthe
thefuture andand
future allocate resources
allocate in consideration
resources in consideration of
business environment & market conditions.
(2) To coordinate plans and activities. Budget needs to be coordinated and reviewed to ensure that it is
integrated and cohesive. Budget needs to be revised to reflect current business environment & market
conditions, whether they are of political, economic, social, technological nature.
(3) To communicate plans. Budget expectations needs to be communicated to ensure that the relevant
departments are made accountable for implementation of the budget. Employees can then coordinate their
operational activities to attain them.
(4) To motivate. Budget can influence behaviour to perform in line with the organisation’s goals and
objectives.
(5) For control, budgeting allows an organization to meaningfully compare goals vs actual result and manage
any non-performance that arises.
(6) To evaluate performance. Feedback is given to employees on how well they are performing against the
goals and targets. Well managed performance evaluation can positively influence behaviour for improved
performance.