CIMAPRO19-P01-1 Exam - Topic 9 Question 24 Discussion

Question

A medium-sized manufacturing company, which operates in the electronics industry, has employed a firm of consultants to carry out a review of the company's planning and control systems. The company presently uses a traditional incremental budgeting system and the inventory management system is based on economic order quantities (EOQ) and reorder levels. The company's normal production patterns have changed significantly over the previous few years as a result of increasing demand for customized products. This has resulted in shorter production runs and difficulties with production and resource planning.

The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management.

Select ALL the benefits for the company that could occur following the introduction of an activity based budgeting system.

Lorrine · Accepted Answer

A) Under an activity based budgeting system, resource allocation is linked to the strategic plan is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company's strategic objectives are included in the budget. and C) Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities. and D) ABB systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness of this approach is that it gives little indication of the link between the level of activity and the cost incurred. and F) Activity based budgeting allows the identification of value added and non-value added activities and ensures that cuts are made to non-value added activities. ABB is also useful for review of capacity utilization.

Lorrine · Answer

B) Under an activity based budgeting system the focus is on existing resources and operations. Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated. Under a traditional budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included.

Lorrine · Answer

E) The approach under an activity based system is to make arbitrary cuts in order to meet overall financial targets.