Ethan is the newly appointed CEO of ATT Group. He sees that the company is wasting financial resources on unnecessary spends. To solve this problem, Ethan requires all functional managers to prepare their department budget from scratch. Each spend must have justification or it will not be approved.Which budgeting method is Ethan using?
Answer(s): B
There are four common types of budgets that companies use: (1) incremental, (2) activity-based, (3) value proposition, and (4) zero-based.Incremental budgeting takes last year's actual figures and adds or subtracts a percentage to obtain the current year's budget. It is the most common method of budgeting because it is simple and easy to understand.Activity-based budgeting is a top-down budgeting approach that determines the amount of inputs required to support the targets or outputs set by the company. For example, a company sets an out- put target of $100 million in revenues. The company will need to first determine the activities that need to be undertaken to meet the sales target, and then find out the costs of carrying out these ac- tivities.In value proposition budgeting, the budgeter considers the following questions:- Why is this amount included in the budget?- Does the item create value for customers, staff, or other stakeholders?- Does the value of the item outweigh its cost? If not, then is there another reason why the cost is justified?Value proposition budgeting is really a mindset about making sure that everything that is included in the budget delivers value for the business. Value proposition budgeting aims to avoid unneces-sary expenditures although it is not as precisely aimed at that goal as our final budgeting option, zero- based budgeting.As one of the most commonly used budgeting methods, zero-based budgeting starts with the as- sumption that all department budgets are zero and must be rebuilt from scratch. Managers must be able to justify every single expense. No expenditures are automatically "okayed". Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not considered absolutely essential to the company's successful (profitable) operation. This kind of bottom-up budgeting can be a highly effective way to "shake things up". This is the method used in the scenario.
- CIPS study guide page 58- Types of Budgets - The Four Most Common Budgeting Methods (corporatefinanceinstitute.com) LO 1, AC 1.4
To improve the productivity, Plantation Ltd is planning to purchase a tractor, which it has never bought before. The project must be quick to catch up with the next growing season. Leanne, a jun-ior procurement staff at the company, assumes that she could skip market analysis stage to save time. Is this assumption reasonable?
Answer(s): C
Market analysis is a stage in CIPS Procurement and Supply Cycle. This stage informs the purchaser about the number of suppliers, the average pricing, and product trends. Even urgent purchase should undergo market analysis. Without undertaking this stage, the buying organisation may not purchase the right product, or they may purchase at higher price.
CIPS study guide page 63-71LO 2, AC 2.1
Which of the following methods will enable a company to eliminate waste, lost time and lost material from its processes?
Answer(s): A
Lean design is about maximising the value that a customer receives and at the same time minimis- ing waste in delivering that value.For an organisation to be `lean' it must have had all non-essential resources removed (ie. anything that does not add value, see below). This is efficient and cost effective, in that the value/supply chain can theoretically do exactly what is needed of it and no more, but requires sound forecasting and planning of demand and supply. It is most suitable for industries with stable product specifications, long lead times and few impulse purchases.Organisations which are `agile' react as quickly as is practicable to provide a cost effective response to customer demand. This is based on flexibility in design, supply, production and distribution. It is most appropriate for products such as fast fashion and foodstuffs which must be on display and available when wanted by the customer.
- CIPS study guide page 153-156- Agile Supply (cips.org)LO 3, AC 3.3
Why should procurement professionals develop business case before seeking approval to purchase capital equipment?
Answer(s): D
A business case is developed during the early stages of a project and outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project. One of the first things you need to know when starting a new project are the benefits of the proposed business change and how to communicate those benefits to the business.Preparing the business case involves an assessment of:- Business problem or opportunity- Benefits- Risk- Costs including investment appraisal- Technical solutions- Timescale- Impact on operations- Organizational capability to deliver the project outcomes These project issues are an important part of the business case. They express the problems with the current situation and demonstrate the benefits of the new business vision. Making business case with multiple options and choices also prompts the procurement and senior management to consider alternatives. As a result, the organisation may opt out the best option. The business case brings together the benefits, disadvantages, costs, and risks of the current situa- tion and future vision so that executive management can decide if the project should go ahead.
- CIPS study guide page 19-21- How to Write a Business Case - Template & Examples | Adobe Workfront LO 1, AC 1.1
Which of the following are most likely to negatively affect the suppliers' bargaining power in a specific market? Select 2 that apply:
Answer(s): B,C
The bargaining power of supplier is a major determinant of the structure of an industry and also how much profit is available to organisation operating in that industry. Supplier is weak if:- Substitutes are available and easy to access- Suppliers are small and fragmented- The industry is important to the seller- The sellers' product or service is not an important of the industry's value chain- The sellers' product or service is undifferentiated- There are no significant switching costs- There is no threat of forward integration.Suppliers may have more power:- If they are in concentrated numbers compared to buyers.- If there are high switching costs associated with a move to another supplier.- If they are able to integrate forward or begin producing the product themselves.- If they have specific expertise or technology needed to manufacture goods.- If their product is highly differentiated.- If there are many buyers and none make up significant portions of sales.- If there are no substitutes available.- If there are strong end users who can exert power over the organization in favor of a supplier (This can be the case in labor situations).In all of these cases, the bargaining power of suppliers is high to demand premium prices and set their own timelines.LO 2, AC 2.2
Post your Comments and Discuss CIPS L4M2 exam prep with other Community members:
Our website is free, but we have to fight against AI bots and content theft. We're sorry for the inconvenience caused by these security measures. You can access the rest of the L4M2 content, but please register or login to continue.