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ACCA Strategic Professional · Advanced Performance Management · Budgetary planning and control

Harlow Pharma operates in a volatile market where demand and input prices change rapidly. Its annual fixed budget is agreed in November and not revised, and managers' bonuses depend on meeting it. Which change would best improve the budget's usefulness for planning and control in these conditions?

Adopting rolling forecasts with targets adjusted to current conditions, in the spirit of beyond budgeting, best fits a volatile market. A fixed annual budget quickly becomes outdated and can distort behaviour when bonuses depend on it. More detail, bigger uplifts or imposed targets do not solve that problem.

  1. AMove to an incremental budget with a larger inflation uplift
  2. BAdopt beyond budgeting-style rolling forecasts with flexed targets relative to current conditionsCorrect
  3. CMake the budget more detailed with more cost lines
  4. DImpose targets centrally to avoid negotiation

Explanation

In a volatile environment a fixed annual budget quickly becomes outdated and can drive dysfunctional behaviour when bonuses depend on it. Rolling forecasts and targets adjusted to current conditions keep control meaningful. A bigger uplift, more detail or imposed targets do not address obsolescence.

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