22421: Management Decisions and Control - Student guide

Topic: Planning

Key concepts - Why plan ahead?

- Using PMS for planning
- Zero-based and incremental budgeting
- Forecasting and target setting

Weekly For students to be able to:

objectives:
- Understand how accounting information is produced and used to support
organisational planning.
- Identify and interrogate the assumptions within a budget

Readings:
 Chapter 9 in Langfield Smith Textbook
 Case study: Royal Wessanen NV
 Barrett and Fraser (1977) “Conflicting Roles in Budgeting for Operations”, Harvard Business Review

m
er as
Recommended readings:

co
eH w
 Deloitte report: Zero-based budgeting: Zero or Hero?

o.
Revision questions
rs e
ou urc
1. Imagine a company that sells luxury ski packages to various locations such as Japan, Canada and New
Zealand. What sort of factors should they consider to improve the accuracy of their annual sales
forecasts?
o

2. What is meant by top-down budgeting and bottom up budgeting?

aC s

3. What are the advantages and disadvantages of participative budgeting?

v i y re

4. What are the advantages of zero-based budgeting?

5. Barrett and Fraser state argue that budgets are valuable in planning because they force management
to examine the both the general economic situation of which the company is part and the economic
ed d

interrelationships among the company’s various activities. How exactly do budgets do this? How
ar stu

does this occur?

Homework tasks
sh is

HW TASK 1: Organisational analysis of Royal Wessanen NV

Th

1) Download and read the Royal Wessanen case study

2) As you read the case closely, you will come across words and phrases that are important to
understand but sometimes easy to gloss over. Explain what each of the following means:
 “Two-tiered board structure” : A corporate structure with boards of directors. A management
board oversees the company and provides general direction, while a supervisory board must
approve major business decisions. Half the supervisory board is elected by shareholders while
the other half represents employee interests. It appoints the management board.
 “Keep growing the top line while protecting margins” : top line refers to the company’s
revenue (gross sales) while the bottom line represents the company’s net income. These two

This study source was downloaded by 100000783311865 from CourseHero.com on 03-31-2021 23:14:49 GMT -05:00 Page 1

https://www.coursehero.com/file/46590331/HW-Task-7docx/
 22421: Management Decisions and Control - Student guide

figures determine the profit margin of a company to maintain high margins with increasing
sales, expense need to be kept to the minimum to achieve best margin.
 “Category management: a retailing and purchasing concept in which the range of products
purchased by a business, organization or sold by a retailer is broken down into discrete groups
of similar or related products; these groups are known as product categories.
 “Divest all US businesses: spilling up parts of a company as required by the Federal Trade
Commission before a merge with another firm can be approved.
 “Benelux: is a politico-economic union of three neighboring states in western Europe: Belgium,
Netherlands and Luxembourg,
 “Multichannel approaches with channel specific solutions”: the implementation of a single
strategy across multiple channels or platforms, thus maximizing opportunities to interact with
prospective customers.

m
 “Private Labels”: the product line (s) developed specifically by one entity and only sold by the

er as
entity, not sold out to other channels.

co
eH w
 “Diversified conglomerate”: A company that is highly diversified and produces many products

o.
and services that may be unrelated.
rs e
 “Strengthened balance sheet”: balance sheet that yields great ratios in terms of all aspects.
ou urc

 “OPCO’s” : operating company, “ typically used when describing the primary operating
o

company involved in an opco/propco deal.

aC s

“Hyperion Enterprise Performance Management tool”: the processes designed to help

v i y re


organizations plan, budget, forecast and report on business performance as well as consolidate
and finalize financial results (often referred to as “closing the books”.
ed d

 “Net sales” : value of sales adjusted for discounts.

ar stu

 “EBIT: earnings before interest and tax.

 “Working capital”: the capital of a business which is used in its day-to-day trading operations,
calculated as the current asset minus the current liabilities.
sh is

 “Seasonality effect: a characteristic of a time series in which the data experiences regular and
Th

predictable changes that recur every calendar year.

 “Target achievement on each performance measure was strictly cumulative”: by targeting
the achievement of each performance measure, the overall performance is also targeted and
exceeded.
 “Reforecast”: Companies can review their budget against actual as the year progresses and
make alterations and decisions that take into account new information or shifts in the business
environment. Because reforecast involves a holistic view of the budget instead of changes to
individual line items, it provides a big picture view of what may need to change.

This study source was downloaded by 100000783311865 from CourseHero.com on 03-31-2021 23:14:49 GMT -05:00 Page 2

https://www.coursehero.com/file/46590331/HW-Task-7docx/
 22421: Management Decisions and Control - Student guide

 “Stress test a possible drop in revenue of 10%”: testing the elect of the drop in revenue with
other financial items to understand the underlying elect of the change.
 “Ring-fenced”: portion of a company’s asset or profits are financially separated without
necessarily being operated as a separate entity. This might be for: regulatory reasons, creating
asset protection schemes with respect to financing arrangements.
 “Line-by-line basis”: comparing and evaluating performance based on each individual item on
the financial report.
 “Safeguard the margins”: securing and always making sure the margins are kept around the
desired or forecasted figures.
 “Hurricane proof scenario”: planning and forecasting the most catastrophic scenario to come
up with plans to tackle and mitigate should the situation occur.

m
3) During 2009, Royal Wessanen NV appeared to go through several major strategic changes. How did the

er as
corporate strategy of the organization change? Changes to the corporate strategy:

co
- Reorganizing the legal entity structure following the split of business lines.

eH w
-Locations has been rejigged.

o.
-Layouts to help reduce overhead costs.
rs e
After the split, the America team will take over the Karl Kemper and Righi in Germany and Italy, while the
ou urc
Panos Brands will become its own entity which also manage Liberty Richer.Tree of Life remains as an
independent entity, though later on was sold, and the rest of the North America structure remains
o

unchanged. ABC required restructuring and as a result could not be put up for sale as expected.
aC s

a7er the split, the America

v i y re

team will takeover the Karl

ed d
ar stu

Kemper and Righi in

Germany and Italy,
sh is
Th

whilst the Panos Brands will

become its own enty which
will also manage Liberty
Richer. Tree of
This study source was downloaded by 100000783311865 from CourseHero.com on 03-31-2021 23:14:49 GMT -05:00 Page 3

https://www.coursehero.com/file/46590331/HW-Task-7docx/
 22421: Management Decisions and Control - Student guide

Life remains as an
independent enty though
later on was sold, ans the
rest of the North America
structure remains
unchanged. ABC required

m
restructuring and as a result

er as
co
could not be put up for sale
eH w
o.
rs e
as expected
ou urc
4) Review the organizational chart (Exhibit 2) Show how this organization chart will change after Royal
o

Wessanen divested of the US businesses.

aC s
v i y re

HW TASK 2: Analysis of Royal Wessanen NV’s planning processes

5) Referring to the section “Planning and Control”, how can we characterize Royal Wessanen’s original
ed d

budgeting in terms of the following (for each list evidence and facts of the case that justifies this
ar stu

characterization):
a) Bottom-up vs. top-down: BU is guided by the Exec Board with specific targets on the three KPIs that
sh is

formed the back-bone of the reporting of the company: Net Sales, EBIT, and Working Capital.
b) Incremental vs. zero-based: Zero-based budgeting is a budgeting method where current year’s
Th

budget is prepared from the scratch. Incremental budgeting is a budgeting method where current
year’s budget is prepared by making changes in the past year’s budget. The changes are in the form
of addition or reduction of expenses in last year’s budget.
c) Propensity for budgetary slack: propensities to create slack are lower where managers participate
actively in budgeting, particularly when technologies are relatively predictable. But such propensities
are higher if a tight budget requires frequent tactical responses to avoid overruns.

6) Why did management change the budget for the “hurricane scenario” during the 2009 budget year?

This study source was downloaded by 100000783311865 from CourseHero.com on 03-31-2021 23:14:49 GMT -05:00 Page 4

https://www.coursehero.com/file/46590331/HW-Task-7docx/
 22421: Management Decisions and Control - Student guide

7) What were some of the key assumptions of the hurricane scenario budget? The second and possible
more contentious quandary was whether to change the targets in the OPCO manager’s bonus schemes.
After a tough reporting for most cost line- items even against the original budget, the Exec Board decided
to drop the original budget and the alternative ‘hurricane proof’ scenario into the systems and bonus
schemes.

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
v i y re
ed d
ar stu
sh is
Th

This study source was downloaded by 100000783311865 from CourseHero.com on 03-31-2021 23:14:49 GMT -05:00 Page 5

https://www.coursehero.com/file/46590331/HW-Task-7docx/
Powered by TCPDF (www.tcpdf.org)