There are two key areas that come up in the budgeting narrative tasks:
- You might be asked to look at a budget and explain the assumptions that were used in creating it. The best approach here is to go down the budget line by line discussing each element in turn. So it may start with volume figures and move on to expected unit selling prices or costs. There may be some detail on costs such as material requirements in kg, expected prices per kg. Try to build the numbers from the budget into your answer (numbers of units, unit prices, costs per kg etc). It is particularly useful to show some percentages to give depth to your analysis. For instance, if you have this year actuals as well as the budget for next year show the percentage change in figures. If volume is going to increase by 10% and price by 5% this can help explain why revenue is expected to rise by 15%.
- You may be asked to suggest suitable KPI’s (Key Performance Indicators) for different aspects of the business. Try to use a bit of common sense here. If you are looking at labour cost for instance you could calculate: labour cost per unit, labour cost per hour, number of labour hours per unit, average number of units produced each hour, percentage of hours that are idle, number of staff employed, average revenue per employee, average hours worked per employee each week…and more…make sure you are giving a decent range of possible KPI’s.
- You may be asked to explain reasons why variances have arisen. The key here is to be as specific as possible. If there is an adverse material cost variance don’t say something bland and meaningless like ‘this might be because we spent more on materials’. Saying ‘suppliers may have charged more per kg than expected due to a shortage of supply’. Another good example is ‘material usage may have risen due to excessive wastage’ are far more specific and useful. In particular, read the scenario of the task carefully as this will often give useful clues to use. For example there maybe information about a supplier going bust and your business being forced to swap to a more expensive source of material.
- You may be asked to consider some of the problems of setting standards and budgets. These can range from the inherent uncertainty involved in (guessing!) what will happen in the future. Managers may build in slack into their budgets to make them easy to achieve. There is also the possibility of using bout of date information and ending up with a budget that has little relevance to the current production environment. There are many problems with allowing managers to set their own budgets.
The key is to practice as wide a variety of tasks as you can. Make sure that you always make yourself write full “proper” answers. It is particularly useful to go through the AAT’s PC-based sample assessments and look at the model answers in detail. They will give you a good feel for the volume and the sorts of points they are looking for.
We also have a blog on the narrative tasks for the next unit, Decision and Control, which you can find here.