Scenario for all three analytical questions:
Big Byte Computing Co. (BBC) develops specialised software for the security industry. BBC has two ‘off the shelf' software products, one that manages the storage and retrieval of surveillance video, and the other that manages alarm systems. They also provide a consulting service that assists businesses to customise and implement these software solutions. BBC has a product-based structure, with a business unit manager responsible for each of the three products, as follows:
A high level description of BBC‘s annual financial planning and control process is as follows (BBC has a 30 June year end):
· January: The senior executive team meets to review BBC's current strategy, and produce a ‘strategic plan' for the following five financial years. This strategic plan, including high level profit expectations, is communicated to the wider management team.
· Early February: The three BU managers produce their budgeted income statements for the following financial year, and submit them to the budget committee (consisting of the Chief Executive Officer, Chief Finance Officer and the Executive Manager HR and Strategy) .
· The budget committee reviews the BU's submissions, and communicates any changes required.
· Late March: The three BU managers re-submit their budgeted income statements to the budget committee.
· The budget committee reviews the revised submissions, and then either approves them, or makes arbitrary changes to achieve their required budgeted profit figure.
· The final approved budget is then ‘uploaded' to the company's financial system for management reporting in the following year.
· Monthly from July 31: Performance reports are produced for senior management, including income statements for each BU showing actual performance against budget.
1. One of the purposes of budgeting is planning. Discuss this purpose in the context of BBC's financial planning and control process. In doing so you should discuss how budgeting could be used to support the planning process, identify the role of the firm's management accountant (who reports to the CFO) in this activity and provide examples of the sort of information he/she would be likely to provide.
2. Two of the purposes of budgeting are: controlling profit and operations; and evaluating performance and providing incentives. Discuss these two purposes in the context of BBC's financial planning and control process, and describe what you consider would be the role of the firm's management accountant (who reports to the CFO) in each of these activities.
3. BBC's CEO is considering expanding the budget committee to include the three business unit managers and has approached you, a trusted consultant to BBC, for advice. Advise the CEO on the advantages and disadvantages of this proposal (with particular reference to BBC's process).