Budget Management Accounting

The financial well being of the company is supported with the help of budgets as it helps in the examining the success of its business and various operations for which the same was prepared. Budgets are of various forms and have a tremendous purpose that acts as a backbone to every company.

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HI5017 Managerial Accounting
Trimester 2 2018
Individual Assignment

Budget
Executive Summary
The financial well being of the company is supported with the help of budgets as it helps in
the examining the success of its business and various operations for which the same was
prepared. Budgets are of various forms and have a tremendous purpose that acts as a
backbone to every company. The following report will provide an in-depth view of the
budget and its implications. To gain a better understanding from the report, two articles are
taken into consideration. Incentive system based on budget is reflected by one article and
aggregated budget by the second one. Also, both the articles are compared in order to come to
a conclusion that reflects the significance of a budget in supporting the corporate so as to
achieve its goals by doing financially well and gaining success in its various operations.
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Budget
Contents
Introduction...........................................................................................................................................4
Application of Budget in Management Accounting...............................................................................5
Purpose of the two study......................................................................................................................5
Effect of Budget framing........................................................................................................................6
Incentive system based on budget........................................................................................................7
Learning/ outcomes...............................................................................................................................8
Similarity..............................................................................................................................................10
Difference between the articles..........................................................................................................10
Conclusion...........................................................................................................................................11
Learning...............................................................................................................................................11
References...........................................................................................................................................12
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Budget
Introduction
Management accounting is that one significant segment of any corporation that assists the
same in the accomplishment of its goals. Management accounting aids the organization in the
making of effective decisions. Management accounting is performed by the management
accountant of the company. The management accountant of the company helps in organizing
various activities as well as provides support to the financials of the company. This means
that it is the management accountant of the company that basically looks after its budgets
(Horngren & Foster, 2008). Considering the significance of budgets in an organization it can
be said that budgeting is the most important task handled by the management accountant of
the company. He also looks after assigning funds to their respective departments.
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Application of Budget in Management Accounting
The most significant purpose of the management accounting is to facilitate budget. It is only
due to management accounting that the organization is able to implement budget techniques
appropriately. It can be observed that the objectives of the management accounting are
similar to that of the budgeting techniques and the process of budgeting. The management
accountant enjoys the control of budgeting which is one of the strongest tools of any
company (Parrino, Kidwell & Bates, 2012). If the budgets are appropriately planned and
managed by the company then there are chances for the company to excel and thrive in the
market.
Planning is the derivative of budgeting. Planning is incorporated alongside when a budget is
made so as to help an organization to accomplish its goals. Every single plan of a company is
analysed for the purpose of budgeting so as to allow it to become tangible that shall assist the
company in the tracing and tackling of potential risks. This sheds light on the application of
the running process by the management accountant so as to mitigate risks that can impact the
performance and financial well being of the company (Horngren & Foster, 2008). Budgeting
provides processing of planning processes that are to be implemented by the management
accountant so as to tackle the potential risks associated with the business in such a manner
that the operations and performance of the company are not impacted (Shim & Siegel, 2009).
Purpose of the two study
The entire concept of budgeting is on the basis of facts and represented in figures that are
estimated in the process so as to carry the concerned activity based on that and draw
comparisons with the actual results. The same has been highlighted with the help of these two
articles. A budget helps the organization in detecting and mitigating any existing and
potential risks. It is highly significant for every organization for it helps in choosing the best
way out of several options that are available for the purpose of employing the finances of the
organization in a manner that yields high returns. Where every single expense is reported by
the company the need for the preparation of master budget arises. A master budget is required
by a corporation that reports all its expenses no matter how huge or small they are. The
master budget is inclusive of all the budgets such as production budget, sales budget,
purchases and sales of any equipment done or should be done by the company, etc.
Considering all such scenarios, it can be said that budgets act as a decision making tool for it
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Budget
highlights such departments and the areas of an organization that needs to be taken duly care
of (Needle & Powers, 2013).
The budget also provides assistance to the corporate in adjusting its strategies. It means that if
a company gets to know of its areas that need improvement and restructuring, the same can
be done with the help of incorporating newer strategies or redeveloping the older ones so as
to regulate and avoid the unnecessary expenditures (Marsh, 2009). Take, for instance, an
organization is lacking behind in the estimated sales targets. The same can be overcome by
means of boosting its marketing skills and better strategies. If an organization is lacking
behind the targeted value that was estimated for revenues the same can be overcome by
enhancing its marketing and sales. Such strategies help the company and should be taken into
consideration while preparing the next budget.
The progress of the business of a company can be ascertained and evaluated by means of
stating the plans made by it in context to the purchase of property, types of equipment and
machinery in the budget. It is the choice of the company to distinguish the funds that are
reserved for the purpose of development from the funds that are saved for the purpose of
purchasing of more assets. Since the organizations are more into safeguarding its existence in
the years lying ahead, the process of decision making has gained more significance and has,
therefore, become a broader concept.
Effect of Budget framing
The budget allows the company to evaluate its performance. This is due to the fact that the
budget also acts as a tool for performance measurement. It means that a company can easily
measure its performance with the help of budgets by means of analysing and assessing the
same. This allows the company to evaluate its success for a particular period of time. The
comparison drawn between the actual performance and the budgeted performance of a
company highlights the performance of all its areas and segments. The performance of all
these areas can be evaluated and considered for the next budgets (Brown, Fisher, Peffer &
Sprinkle, 2017). This comparison drawn between the actual and budgeted performance of the
company allows it to evaluate the appropriateness and effectiveness of each and every task. If
the results of the comparison say that the company is not operating effectively, then such
measures are planned and implemented so that the performance of the same improves in the
upcoming years and the goals are accomplished.
Coordination is also one of the by components of budgeting and an important factor in the
framing of the budget. A budget helps the company in being aware of the efficiency of
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coordination that exists between the different departments and segments of the company. For
an organization to accomplish its goals the level of coordination between the segments,
departments and the people is really important. Better the coordination better shall be the
performance of tasks and therefore better are the performances and results. This shall make
easy for an organization to accomplish its goals (Brown, Fisher, Peffer & Sprinkle, 2017).
The performance of the employees of the company can be evaluated by means of drawing
comparisons between the budgeted results and the actual results. This will help the
management to come across the weak areas that are required to be given more focus on so as
to overcome the shortcomings and ascertain better results. The company shall implement
strategies by means of giving better remuneration, bonuses and such other rewards to that
personnel who have outperformed themselves or have achieved/ crossed their targets so as to
motivate the employees to perform better which could help the company in accomplishing its
targets (Vaitilingam, 2010). Optimum utilization of resources can also be achieved by means
of a budget for it allows the use and allocation of resources in a manner that can help the
company in achieving equilibrium with respect to its cost, risks and revenues.
It completely depends on the company on how it prepares its budgets and how the same is
used for accomplishing its organizational goals. The budget helps the management of the
company to make decisions based on the results drawn from the comparison between the
actual and budgeted performance of the company.
Incentive system based on budget
The incentive system is one of the most significant aspects for the management of any
organization so as to function its operations. Incentive system is dependent on many factors.
The parameters on which incentives of an employee depends upon is performance evaluation,
investment planning, motivation, product pricing, utilization of the budgeting information,
etc. The appropriateness of the functioning of the budgetary process is as a result of various
factors (Lanen, Anderson & Amher, 2008). There are a variety of reasons that can allow the
management to approve budgets out of distorted/ biased information in the accounting
system. The management approves or rejects budgets out of biasness owing to their
inefficient and inappropriate decision making skills which allow the process of budgeting to
shatter and fail. Therefore, it is always advisable for the management to scrutinize, assess and
evaluate information that seems to appear distorted in their eyes for if ignored the same can
impact the company’s performance and its operations (Lanen, Anderson & Amher, 2008).
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Budget
Also, if the organization takes a group incentive system into consideration the barriers that
come in the path of selecting and applying budget gets eliminated. Group incentive system
assists in the evaluation of cost and difficulties that can be faced while calculating and the
performance of an employee. This system allows the organization to improve its efficiency
by motivating its employees to get involved in a manner that improves their individual
performance. It also brings coordination amongst employees that helps the organization in
bettering its overall performance and yield higher revenues (Vanderbeck, 2013).
Compensation to budget is also systematically linked by the company through these group-
based contracts and the regular extensive use of the same. The lack of coordination,
cooperation and communication amongst employees is noticed while the group budgets are
evaluated and assessed (Horngren, 2011). If the budget base contracts are better than other
contracts in a group setting is also not yet known.
Not just the senior management of an organization but also the subordinated are impacted as
a result of the budgeting process. Following are the factors that impact the estimated budgets
and are also related to one another.
• The comparison is drawn between the estimated budget and actual results.
• The methodology used by subordinates for estimation.
• Communication of the information to the superior.
The employees are required to be trained with effective programs that are very much required
for learning and understanding appropriate budgeting techniques. For the purpose of the
same, it is the responsibility of the government to come up with such training programs by
means of establishing various schooling infrastructures in as many locations so that more and
more employees can participate and learn the techniques of proper budgeting. Activities that
have cost aspects and long-term plans can be segregated further into various annual budgets
that shall be of help in incorporating and implementing the monetary figures within an
organization (Horngren, 2011). The organization can go back to its traditional system as soon
as it achieves its long-term goals. This will help in computing the contrast between the costs
and expenditures that were estimated in the budget and the costs and expenditures that are
actually incurred (Vanderbeck, 2013).
Learning/ outcomes
All the above factors are the ways by which budgets act as a tool for decision making to the
organization in all the aspects may it be financial or no financial. From the articles it can be
made clear that the organization is able to accomplish its targets with the help of decisions
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taken by the management on the basis of comparison drawn between the standard
performance and actual performance of the organization. The decision making process when
blended with budgeting techniques can act as beneficial for the organization in achieving its
set targets.
An organization needs to assess its financial aspects such as profits, sales, overheads, etc and
non-financial aspects such as consumer satisfaction, feedback, consumer loyalty,
competition, etc. For the purpose of making effective and appropriate decisions, it is very
much required for the company to consider both financial and non-financial aspects for
assessment.
The utility of aggregated budget is immense. The idea is basically to apportion cores that are
independent but identical amongst the population so as to derive unit cost. It is a moderate
outcome of aggregation in budgeting. The subordinates are compelled to submit aggregate
cost distribution so as to evaluate proposals of high budget. There can be such a phenomenon
where the senior management keeps the private information related to the costs of a particular
project to themselves and submit the same to the management lying above them. Such a
system can help in framing a strong financial policy (Needles, 2011). This can be of
immense help to the companies in terms of creating a favorable policy.
High costs budgeted by the employees in their budgets that are submitted to the senior
employees might get rejected by them. This can be due to the reason that the senior
management might believe that the budgets are exaggerated and there are chances of misuse
of resources which might not be true. It should be noticed that the underlying average cost for
the project shall become moderate when there are more than one projects covered under a
budget. This shall result in the higher cost realization. So if a subordinate wants the budget to
get approved by his seniors it is required for him to develop and present a budget proposal
that shows moderate or lower costs with greater returns. However, if the senior is
knowledgeable and has a legitimate experience in budgets, he shall assess the budget
developed and presented by the subordinates and analyse the reason behind the aggregation
of costs represented in their budgets. If the evaluation of such exaggerated costs seems
reasonable to him after he analysed single cost there are chances he might not find the several
costs that reasonable which can make him reject the budget proposal.
Apart from the appropriateness and utility of a particular project, there are some other factors
on the basis of which a superior can reject or accept the budget proposed by his subordinates.
Budget biasing or distorted information in the accounting system are one of the factors on the
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basis of which budgets can get approved or disapproved. If the decision is taken based on the
biasness then this could happen for mainly 3 factors which are discussed below.
Similarity
Both the articles projects on the utility of the budget. With the help of budget, it is easier to
implement control in the organization. It can also help in the performance evaluation of the
company. The budget also helps in the tracing and mitigation of potential risks that further
paves ways for the organization in accomplishing its goals. An organization through means of
management accounting does not just get its budgets prepared but also benefits enormously
due to the evaluation of its performance done by the same and by mitigation of potential
risks. Budgeting is incomplete and a failure without effective communication for in the
absence of the same, coordination gets impacted (Fisher, Peffer & Sprinkle, 2003). Through
the means of the budget, it becomes easy to update the respective departments of the
organization about the financial plans and such other information that will the help the
organization to mitigate its potential and existing risks and survive its existence despite the
intense competition in the market in the future (Robinson & Last, 2009).
Difference between the articles
As both, the articles represent budgets and the implications of budgets it must be noted that
the budget has enormous utilities to any organization. Both articles represent that how
budgets are significant for every organization. It helps the organization to trace its
shortcomings and area that require reconstruction and proper care so as to perform better and
diligently accomplish its organizational goals and targets. It helps the organization in decision
making, performance measurement and building a positive image. It also helps the
organization in long-term planning.
But there is a contrast between both the articles in the context of the form of action. In one
article, a compensation scheme is the basis of budget. Managers along with subordinates are
most likely to get benefit from this form of the budget. This article is highly significant for
the managers so as be aware of the situation where such budget can be considered of taken
into use. This article is bent towards the appropriateness of the budgeting process (Fisher,
Peffer & Sprinkle, 2003). The other article is more about aggregation planning. This kind of
budget is mainly used for high-cost projects as it helps in yielding greater revenues.
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Conclusion
It can be concluded that the employees are more enthusiastic about their performance since
the incentive plans are implemented. It allows them to earn more income in the form of
bonuses and keeps them motivated and engaged at the same time. The estimation made by the
intermediate managers was not that different from that which was made during the pre-
incentive plan period. This was due to the presence of personal interest of the middle
managers. It is required for the management to analyse all the aspects of the budget process
thoroughly so as to make sure the budgets are utilized in an appropriate manner in the
company.
Learning
The target of the organizations gets impacted while the higher level management of the
organization becomes distorted if the budget is based on the decisions of the buyers. The
interpretation of the performance of the organization can become quite difficult as it can vary
due to the decisions based on a single budget that further conflicts with the other utilities if
the budget.The management can easily evaluate the performance of the employees with
regards to their involvement and level of participation in the various types of budgetary
process and depending on the same can reward them.
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Budget
References
Brown, J. L., Fisher, J. G., Peffer, S. A., & Sprinkle, G. B. (2017) The effect of budget
framing and budget-setting process on managerial reporting. Journal of Management
Accounting Research, 29(1), 31. Available from:
https://search.proquest.com/docview/1967368440?accountid=30552 [Accessed 22 September
2018]
Fisher, J. G., Peffer, S. A., & Sprinkle, G. B. (2003) Budget-based contracts, budget levels,
and group performance. Journal of Management Accounting Research, 15, 51-74. Available
from: https://search.proquest.com/docview/210169229?accountid=30552 [Accessed 22
September 2018]
Horngren, C T & Foster, G. (2008) Cost Accounting: A Managerial Emphasis. United States
Edition
Horngren, C. (2011) Cost accounting. Frenchs Forest, N.S.W.: Pearson Australia.
Lanen, W. N., Anderson, S & Maher, M. W. (2008) Fundamentals of cost accounting. NY:
Hang Loose press.
Marsh, C. (2009) Mastering financial management, Harlow: Financial Times Prentice Hall
Needles, B. E.& Powers, M. (2013) Principles of Financial Accounting. New York Press
Needles, S. C. (2011). Managerial Accounting, USA: South-Western Cengage Learning .
Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance, Hoboken,
Robinson, M., & Last, D. (2009) Budgetary Control Model: The Process of Translation.
Accounting, Organization, and Society. NY Press
Shim, J. K & Siegel, J G. (2009) Modern Cost Management and Analysis. Barron's Education
Series
Vaitilingam, R. (2010) The Financial Times Guide to Using the Financial Pages, London: FT
Prentice Hall.
Vanderbeck, E J. (2013) Principles of Cost Accounting. Oxford university press
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