Advantages and Disadvantages of Budgeting in Business Environment

This assignment discusses the advantages and disadvantages of budgeting practices in the business environment. It includes the purpose of two research articles relating to budgeting and their outcomes. The advantages of budgeting include managing resources, establishing control, developing equations between departments, and increasing revenue. The disadvantages include high cost and effort, rifts between departments, and ignoring qualitative needs. The research articles highlight the drawbacks of traditional budgeting and the theoretical approaches to budgeting. The similarities and dissimilarities between the articles are also discussed.

Managerial Accounting
Assignment

By student name
Professor
University
Date: 29th Sep 2018.
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Executive Summary
This assignment has been prepared on budgeting. This includes the various advantages and
disadvantages of budgeting practices in the business environment. For this assignment two
journals relating to budgeting have been studied. The main points learned from these journals are
also being stated below in this report.
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Table of Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................3
Advantages of the Budgeting Process.........................................................................................................5
Disadvantages associated with budgeting...................................................................................................6
Purpose of the Research Articles.................................................................................................................7
Purpose of the Study and the proposed research questions-......................................................................8
Similarities between the two journals-........................................................................................................9
Dissimilarities between the two articles....................................................................................................10
Specific outcomes from the research articles............................................................................................10
Conclusion.................................................................................................................................................11
References.................................................................................................................................................12
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Introduction
Budgeting refers to the process by which individual and organization plan and control
their expenses and based on that they decide their course of action so that in future they get the
desired results. Budgeting is basically the process of plan control and monitor. It is one of best
tool for the companies to decide in what ways they are going to use their overall resources and
how that shall benefit the company with respect to getting the best future outcomes. There are so
many areas where the company and its management needs to focus so having a proper budget
helps them in prioritizing their work and accordingly putting the same to best use. It also helps
them in analyzing the areas of risk and understanding what are the ways in which they can
reduce their overall wastage and cost (Abdullah & Said, 2017). In case the company is not able
to function as per the budget than the management can look for reasons that has caused the same
and then analyze them to get the desired results between the outcomes and the forecasted
outcomes. All this helps in analyzing the company from the professional front and not just for
companies budgeting can be used by individuals also, even they can decide their expenses in
advance so that they get the desired results in future. There are various kinds of budget that can
be made by the companies like sales budget that helps in understanding how much inventory the
company needs to stock to fulfil the desired sales target for the company. Thus, it helps in
reducing wastage of resources. Cash budget helps in planning the overall cash expenses so that
the overall liquidity level of the company is maintained. The companies can also make
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production budget that helps in analyzing the overall production of finished goods that the
company should take into consideration (Boghossian, 2017). There are also options of flexible
budget that the companies can make to maintain the price of the wages and the raw materials that
the company would need. Now there has been many changes and advances in the overall concept
of budgeting, and now the companies are making use of different types of budget like zero based
budgeting in which the companies can manage their overall resources and they feel that the
company is not able to use it properly and from scratch the management undertakes the need to
analyze from the base (Bouret, 2017). All these budgeting methods requires a lot of control and
motivation on part of the management of the company and it also requires a lot of cost and effort
so that also needs to be checked. The overall advantages and disadvantages of the budgeting
process is given below:
Advantages of the Budgeting Process.
 It helps the company in managing the resources of the company and making sure that
there is less wastage. It helps in making sure that money is allocated accordingly and
making sure that their money is spend on such resources which the company needs. This
will help the management in achieving their overall strategies and activities and thus in
that process it will help in reduction of the wastage.
 It helps the management in ensuring that there is proper control established and the
management can manage their activities to the best of their abilities. Controls helps in
making sure that there is least amount of risks and the management can take steps to
reduce that. The management can decide which areas they want to focus and which area
they don’t want to take into consideration. So that would help in ensuring an
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uninterrupted approach of power and control and monitoring so that when anything go
wrong they can take steps accordingly (Choy, 2018).
 Budgeting helps in developing equations between various departments of the company
and it helps in establishing a relationship between the stakeholders and the employees of
the company. It helps in employees to understand the overall vision of the company and
of the management and they can make better application of the vision of the company.
Thus, we see that budgeting is an important method as it will help them managing their
resources in the best ways for all the departments (Covaleski, et al., 2003).
 Budgeting helps the company in increasing their overall revenue and profits and reduce
the total amount of cost and plan their expenditure better, so we see that on financial
aspect also, budgeting is an important method for the companies.
Disadvantages associated with budgeting
 The major disadvantage that the planning of the budget will require a lot of cost and
efforts and hence the companies need to understand that they need to have the expertise
which is required to analyse the overall requirements of the company and then prepare
the budget in a more organized manner and the budget should be such that it should not
be superficial, it should be possible for the companies to achieve that and thus that also is
an important part of budgeting (Lavassani & Movahedi, 2017).
 Another disadvantage is that there are so many departments in many companies, and
there are high chances that budgeting might cause a rift between the two departments.
The company has limited resources and thus they need to strategies which company do
they want to invest their resources too. Every department would want that their budget is
passed and they get the best resources so we see that there is a lot of rift that might occur
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between the companies and hence we see that budgeting needs to be done in a balanced
manner.
 There is also a major advantage that budgeting only focuses on the financial needs of the
company, and they ignore all the other aspects and the other non-financial needs for the
company. It means that the management focuses on quantitative needs and not the
qualitative needs for the company. But consumer focuses more on qualitative needs and
that needs to be taken care off by the company.
 In case of budgeting it the managers are reviewing the same on periodical basis and
hence there are chances that the management might fail to monitor how the resources are
being allocated and how they are using it and managing it accordingly. It is not possible
to review the budget every day, as it will require a lot of time of the company and hence
they need to check that accordingly and hence periodic and annual needs of the company
should be checked on beforehand (Visinescu, et al., 2017).
 In case of budgeting there are many other ways in which companies can fail, if they do
not allocate the resources properly and do not apply them for all the departments in best
ways possible. Thus, we see that budgeting can go very wrong and many companies can
fail because of that and there can be irrecoverable loss. So, care should be taken that it
should be a more balanced approach and unrealistic goals that the companies cannot meet
and they would lose a lot (Hansen, et al., 2003).
 Budgeting is not a preferred tool when there is any emergency in the company and then
budget as a whole becomes invalid and that time the allocation of resources becomes a
very difficult task. Budget can only be prepared based on anticipation and under
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controlled situations it can work effectively. So we see that in times of despair budgeting
does not help.
Purpose of the Research Articles.
In this assignment two research articles have been selected that highlights the different aspects of
budgeting and their implications. The first journals are “Practice Developments in Budgeting: An
Overview and Research Perspective” by Stephen C. Hansen of The George Washington
University, David T. Oatley of Lancaster University and Wim A. Van Der Stede of University of
Southern California (Barnes, 2015) and the second journal is “Budgeting Research: Three
Theoretical Perspectives and Criteria for Selective Integration” by Mark A. Covaleski and co-
authors (Calvasina & Calvasina, 2017).
The first article showcases the overall shortcomings that might be present in traditional method
of budgeting and the second article highlights the different theoretical approaches on budgeting
and helps in showing an integrated study that is based on integrative research done by
professionals.
Purpose of the Study and the proposed research questions-
In case of the first budget the authors are discussing the overall drawbacks in the process of
budgeting and how does it affect the companies. Budgeting as a process has many disadvantages
as most of time budgeting requires a lot of time and cost on part of the management, it also
shows that the assumptions that are done by the management are mostly baseless and the aim of
the budget is only reduction of cost and not create some value for the users. All this has been
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discussed in this journal articles, along with methods like activity based budgeting which focuses
on the activity based system of budgeting and not the traditional approach. It also highlights
methods like beyond budgeting method which focuses on setting some targets and then work and
evaluate that based on the past performance of the company (Meroño-Cerdán, et al., 2017). So,
we see that there are various methods that companies can apply when it comes to improving the
overall quality of the budget. The following research questions can be stated from this study-
 What are the overall drawbacks and disadvantages that are associated with traditional
system of budgeting?
 What are the advancement and changes in the traditional system of budgeting that can be
applied for better results?
The second article highlights the integration of the various cost accounting with the preparation
of the budgets of the company. Budgets involves every aspect of the management like cost
accounting, responsibility accounting, measurement of cost compensation etc. Budgeting is
applied in every sector and hence it is highly researched. In this they have discussed three
theoretical perspective on budgeting and have condemned the use of theoretical approach and
focuses more on integrative approach which are restricted to stating alternative assumption and
stating the overall effect (Linden & Freeman, 2017). The authors have also stated the various
economic values that the budget has with relation to the employees and the authorities of the
company. They have also discussed the various budgeting and non-budgeting variable which
includes, budgeting variables like compensation practices, capital budgeting, budget base
contracts etc. It also includes non-budgeting variables like skills of the employees, sources and
structure of information, labor market, welfare of the individuals etc. Thus, the authors have
taken all this perspective into consideration to highlight the various needs of the management.
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The following research questions can be asked-
 What are the implications of the theoretical approach to budgeting and in what ways does
it affect the stand of the management of the company?
 What are the various budgeting and non-budgeting variables and how does it affect the
process of budgeting for the company? And how can management make the best use of
them?
Similarities between the two journals-
1. Both the research article is focused on the different aspects of budgeting and how
companies can make them better from the traditional system is also analysed in these
articles (Naci & Hasan, 2012).
2. Both the articles highlight the various budgeting based practices that companies can
employ and which can help them to make their operations better and improve their
performance.
Dissimilarities between the two articles
1. The first journal article highlights the different shortcomings of the traditional system of
budgeting and how companies can improve the same is also stated while the second
journal article highlights the theoretical approaches of the company that it deals with in
case of budgeting. In case of traditional system the companies would incur huge losses
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given the assumptions made by the management was not logical but in the improved
system there are various ways in which the companies can benefit.
2. The first journal article highlights the shortcomings and improvement in case of
budgeting and the second journal articles highlights the different approaches that the
company can apply in case of theoretical approach and that should be different from the
variable and non-variable variables for the company (Norberg, 2018).
Specific outcomes from the research articles
These are the various outcomes that have been found in the stated articles above –
 The first article highlights the need and purpose of effective decision making when it
comes to budgeting by stating the overall drawbacks that are associated with this process.
It also highlights the that for any business environment it is necessary that changes should
be initiated as time passes, because the traditional methods become redundant and thus
there is a need for new and better techniques as has been highlighted in this assignment
(Linden & Freeman, 2017).
 The second outcome from the first article is that companies should set definite standards
and based on that they should prepare the budgets as that would help them in
understanding and it would help them in understanding the middle and lower level of
management for the company. It also states that there should be continuous updating in
the overall system for the company (Cundill, et al., 2017).
From the second journal the following points have been stated-
 In case of the second journal it states that theoretical basis for budgeting is important but
there is not applicable from practical point of view and thus that is important that
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continuous development of the budgeting practices should be with help of constant
research and updating. It states that budget is more a quantitative process in real life and
in practical world and less a qualitative process and companies should keep this in mind
when they are adopting the same.
 The overall budgeting practices that should be adopted by the company but that does not
solely depend on the practice that suits the company environment, but it also is dependent
on the overall time duration that is required by the companies and is important for the
adoption of the budgeting process. Thus, it highlights that practicality should be there
when it comes to budgeting as a concept and less inclusion of theoretical knowledge
(Raiborn, et al., 2016).
Conclusion
Based on the overall research it can be said that budgeting is an important process that
companies need to follow and that helps them in generating the best results possible. It helps
them in better allocation of resources and efforts so that better results would come for in the
future. It is important that companies should apply various techniques of budgeting in areas that
are needed. They should try to make sure that traditional methods are now changing and
companies should now adopt better and developed methods like activity based budgeting and
many others which can make the process of budgeting easy and help the company in generating
best revenue for the company. It is important companies should do specific research when they
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are applying such tools and should experiment with different kinds of budget so that they can
reap the maximum benefit.
References
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Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.
Barnes, J. L. (2015). How to Tell If Standard Costs are Really Standard. Journal of Management
Accounting Research, 25(3), 130-143.
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational
Philosophy and Theory, 50(3), pp. 244-253.
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Bouret, I., 2017. Benefits of higher education in mid-life: A life course agency perspective. Journal of
Adult and Continuing Education, 23(1), pp. 15-31.
Calvasina, R. V., & Calvasina, E. J. (2017). Standard Costing Games that Managers Play. Journal of
Management Accounting Research, 12(2), 33-65.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Covaleski, M., Evans, J., Luft, J. & Shields, M., 2003. Budgeting Research: Three Theoretical Perspectives
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Lavassani, K. & Movahedi, B., 2017. Applications Driven Information Systems: Beyond Networks toward
Business Ecosystems. International Journal of Innovation in the Digital Economy.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and
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Naci, T. & Hasan, O., 2012. The Measurement and Management of Unused Capacity in a Time Driven
Activity Based Costing System. Journal of Applied Management Accounting Research, 10(2), pp. 43-55.
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