Importance of Budgeting and Capital Budgeting Methods in Managerial Accounting

This assignment discusses the importance of budgeting and capital budgeting methods in managerial accounting. It highlights the advantages and disadvantages of budgeting, and discusses two scholarly articles on capital budgeting. The similarities and differences between the articles are also analyzed.

Managerial
Accounting
Assignment

1
By student name
Professor
University
Date: 29 the Sep 2018.
1 | Page

2
Executive Summary
In the given assignment two articles have been selected that highlights the importance of
budgeting for the companies and includes different methods of analysis for the same. The main
aim is to analyse different aspects of budgeting in such a way that it is beneficial to the company
and its peers. Both are articles are scholarly articles and highlights the overall similarities and
dissimilarities between the two articles and specific outcomes that have been derived from the
same is also stated in the assignment. It highlights why budgeting is important and how
companies can apply the same in ways that is not easily possible.
2 | Page

3
Table of Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Advantages of Budgeting................................................................................................................4
Disadvantages of Budgeting............................................................................................................5
Discussion on the two journals........................................................................................................6
Explanation Of The Selected Management Accounting Topic...................................................6
Purpose of the studies and the research questions set out to be explored....................................6
Similarities and differences between the findings of the 2 studies..............................................9
Specific outcomes and relevant learnings from the research findings.......................................10
References......................................................................................................................................11
3 | Page

4
Introduction
Budget is a term that can be applied in our everyday life application and can be
associated with the various activities that we do as an individual and company. Budgeting is not
important just for the companies but for anything to flow in an economical manner the concept
of budget is very widely used. Budgeting helps in organizing activities in such a manner that
they follow a path that is foreseen and in cases where that path cannot be followed, the reasons
behind the same can be analysed which would be beneficial for the future in all aspects. Thus,
budgeting can be defined as an activity that helps in plan, control and monitor. It is important
that companies should have a proper budget based on which they can decide their future course
of action and if that would be feasible enough or not. There are many areas of risk that the
management would not be aware of but budgeting helps the company in getting proper
knowledge with respect to that. Thus, it helps in reducing the overall risks that the company
might need to face. There are many kinds of budget that the companies can make which includes
monthly budget, sales budget, annual budget, operations budget etc. Thus, we can see that budget
can be made for each and everything and there are no definite methods which the companies
must follow. Cash budget can help in understanding the overall cash expenditures that the
company needs to make in a specific period and what is the total cash amount which they would
need to support their operations (Blocher & Stickney, 1979). Capital Budget helps in calculating
the capital expenditures based on the method of discounted cash flow. Sales budget helps in
forecasting the total amount of sales that the management is contemplating in a year and the
overall stock that they might need for the same. Flexible Budget is also prepared by some
4 | Page

5
companies where they can change the of the same and is mostly used for the pricing of the
materials and the labour. There are many changes that are happening in the overall process of
budgeting and companies are trying different advanced methods of budgeting like zero-based
budgeting in which the management are not sure whether the pre-defined methods of control are
feasible enough, as the overall resources are scare and hence they feel that they need to start the
analyse just from the scratch so that they can form proper judgement on that (Boghossian, 2017).
Out of the various methods of budgeting that has been discussed above, the concept of capital
budgeting would form the basis of this assignment and the two articles are also based on the
same. The overall advantages and disadvantages of the budgeting process have been stated below
for better understanding-
Few of the major benefits that can be associated with budgeting has been stated below:
 It helps in better utilization of the resources of the company, so that they there should not
be any wastage of them. The company can keep its goal of financials very much intact, as
resources can pass through rewarding channels that can help in curbing unnecessary
wastage of the same.
 It helps in defining the future course of actions for the company which they need to
follow and in case there is loophole than they can be held liable and they can find definite
reasons for the shortfall. Organizations can plan their savings and expenditures and can
also define which course of action would they like to take (Egelund-Mu¨ller, Elsman,
Henglein, & Ross, 2017).
 It helps in saving a lot of time and cost on part of the management and help them in
saving a lot of their resources. It helps them in ascertaining that better internal controls
5 | Page

6
are there as management can check the overall flow of resources of the company and can
analyze the loopholes in the system.
 It can help the companies to find the areas in which the risk element is more and thus risk
can be eliminated if the management is able to put the best use of their capabilities.
 It can also be seen that it helps the stakeholders of the companies in understanding
whether the management of the company is functioning to the best of their abilities and
giving best results. It helps in removing the overall uncertainty and prepares the
management for future course of actions which they can undertake (Gullet, Kilgore, &
Geddie, 2018). It helps them in answering the “HOW”, for example the cash budget helps
the management in understanding how much cash expenditure would be there and how
much cash resources do the need for the same. It is important to understand that
management needs to have a vision based on which they can ride their actions and all that
is possible with the help of budgeting.
Disadvantages of Budgeting are-
The following are the disadvantages that are associated with budgeting are-
 The overall method of budgeting involves a lot of cost and efforts on part of the
management of the company. It involves intervention of a lot of human resources, thus
the need is that the management needs to pre-plan this in advance. It involves
assimilation of the data and the companies need to analyze that data and for that they
need more resources that the management may not always provide. There might be a
scarcity on part of the management (Johan, 2018).
6 | Page

7
 Budgeting involves allocation of resources to different departments and it is not possible
that every department gets the equal amount of resources, thus the need arises that better
decision making should happen on part of the management. It might cause a rift between
the departments of the company and they might compete to make sure whose budget gets
approve first and is implemented by the management of the company. It is also possible
that there might be biasness on part of the management, thus the aim should be to make
sure that the management discretion should not hamper the relationship that needs to be
fostered between various departments.
 Budgeting involves a lot of numbers and mathematical calculations, so that might be
wrong, and thus in case the budget is low of mathematical accuracy it can cause a lot of
loss to the management as they had followed that specific budget for their overall actions.
Thus, this might lead to lot of loss on part of the company. Since a lot of assumptions are
involved that are based on the market study there are high chances that these assumptions
might not be always correct. So, we see that it is important that budgets should be
arithmetically correct.
 There may be also situations in which the funds that have been allocated for the
company’s budget are not used in for the purposes that they are supposed to be used for.
It can also happen that in some cases the management can go over budget or under
budget. So, all this will lead to a lot of confusion and the management needs to
understand that they cannot rely on the budget completely and need to apply their
understanding in certain situation. It is thus important that companies should foresee the
actions that they have been taking and in what ways can they change it should also be
considered (Charles H, Giovanna, Dennis M, & Robin W, 2015).
7 | Page

8
 Budgeting will also include many assumptions and that shows that if the management is
not component enough to put that thinking in process they might end up adopting such
methods which are not fruitful for the company. So, in that way budgeting is a complex
process and it is important that the management needs to have proper understanding and
proper assumptions for the betterment of the company.
 Budgeting is an important method but not many managerial professionals have accurate
knowledge about that and hence they need to be provided with proper trainings and that
would cost the company huge and the overall cost would also increase.
Selection of the Journals to be discussed:
The two articles that have been selected in this assignment are “Duration and Risk
Assessments in Capital Budgeting” that are written by Edward and co-authors and the other
article is “The Value of Perfect Information in Capital Budgeting Decisions with Unknown
Cash Flow Parameters” that is written by William and co-authors. Both the articles are based
on capital budgeting and highlights important issues and features of the same.
Purpose of the Research articles and the possible research questions.
The first research article states the overall impact of the selection of the duration and the time
impact in the analysis of the overall value of the investments. The concept of duration is
important for accounting research in this assignment. In case of capital budgeting the main
aim is to compare the present value of the outflow to the discounted value of the future cash
flows that the company will receive in the future. Thus, we see that time is playing an
important role for the calculation of the cash flows and thus it is a factor on which the
8 | Page

9
company is dependent for valuation of the investment. In this research three different cash
flow patterns are compared along with the overall return from the same (Blocher & Stickney,
1979). It highlights that duration should be important for accounting research when it comes
to the concept of capital budgeting. In case of capital budgeting the present cash outflow is
compared with the discounted value of the future cash inflow and hence both are compared
to understand whether the companies should invest in that company or not. The article also
talks about the overall risk that is involved with time and duration when it comes to taking
decisions based on the judgement involved from the management. The cash flows are
discounted based on the overall duration that is included in them, thus the need arises that
when companies are analysing they are considering the correct time and the same is
discussed in this article. The following research questions have been stated-
 How duration plays an important factor for accounting research especially when it
comes to measuring the value of the investments made based on the concept of capital
budgeting?
 How different cash flow patterns give different results and what role does duration
play in that?
The second article highlights the value of perfect information when it comes to investment
analysis based on unknown cash flow method. The same can be stated as an important method
for the estimation of the cash flow patterns for the projected cash flows. Procedures for the
determination of the cash flow patterns is discussed, current source of information based on
which the current beliefs of the company have been taken into consideration. Estimation of the
EVPI with the help of unknown parameters have been discussed by the company (Moore &
Chen, 1983) It is important that expected value of perfect information should be presented in
9 | Page

10
such a manner that it highlights the true knowledge of the decision maker and makes sure that it
is meaningful. It talks about different methods that the companies can employ and different ways
in which they can get the best result only if they have the effective information that they need.
The source of the information should be genuine as it would help them in understanding whether
the decision of the management was correct or not, when they are applying that method of
capital budgeting (Lee & Nobi, 2018).
The following research questions have been stated in this article-
 What is the overall importance of the expected value of the perfect information and how
does it play an important role in case of capital budgeting methods, also how can
management benefit from the same?
 What are the different methods that the companies can comply with the use of various
tools for the treatment of the cash flow that are included in case of valuation of
investments based on the financial needs of the company?
c) Similarities between the two articles:
Both the articles are highlighting the different concepts that are related to capital
budgeting and how companies can use different methods that can help in valuation of the
financial instruments based on the methods of discounted cash flow (Lee & Nobi, 2018). Both
the articles highlight different discounted cash flow methods which they can imply when they are
considering capital budgeting as an important method. It also highlights the need for the
companies to imply the method of capital budgeting for the valuation of their financial
10 | Page

11
instruments and if there are any ways in which they can enhance the overall process and reduce
the elements of risk involved (Abdullah & Said, 2017).
Both the articles have been well written and presented and highlights the different aspect of
capital budgeting.
Dissimilarities between the two articles.
 The first article talks about the importance of duration when it comes to capital budgeting
method and highlights how time plays an important role in measuring whether the
companies should go for a deal or not. In case of capital budgeting the present cash
outflow is compared with the discounted value of the future cash inflow and hence both
are compared to understand whether the companies should invest in that company or not.
The article also talks about the overall risk that is involved with time and duration when it
comes to taking decisions based on the actions involved on part of the management. In
comparison to that the second article highlights the importance of proper information
from proper sources that is the main part of the overall cash flow parameters for the
company (Coate & Mitschow, 2017). It talks about different methods that the companies
can employ and different ways in which they can get the best result only if they have the
effective information that they need. The source of the information should be genuine as
it would help them in understanding whether the decision of the management was correct
or not, when they are applying that method of capital budgeting (Pamela & Tamara,
2013). Thus, we see both the articles are very different and both are analyzing different
methods, aspects and concepts that are related to corporate reporting, and capital
budgeting process as the primary factor of consideration.
11 | Page

12
Outcomes from the two studies.
Based on the overall analysis, following outcomes can be stated from the two studies that
would be helpful to the accountants in Australia.
Article 1.
In case of article 1, the accountants can understand how time duration plays an important role
when it comes to calculation of the discounted cash flow and what are the overall methods that
the companies should adopt to make sure that they are applying the correct duration.
The second outcome would be that this article highlights three different cash flow methods that
can be used for the preparation of the cash flow method and that can be used in capital budgeting
and thus the accountants can use these methods and can apply them in practical life so that they
get the best results (mejia, Tosi, & Hinkin, 2017).
In case of Second article, the accountants will come to know about the different methods that
they can apply for the management of their capital budgeting statement. The management needs
to understand that they need to choose such a method that would help them in getting the most
accurate results based on which they can take the decisions for the company. Each method has
their positives and negatives and thus companies need to state the same (mejia, Tosi, & Hinkin,
2017).
The second outcome would be that the accountants would understand that how important it is to
have effective value of information when it comes to application of the same to fragmented
12 | Page

13
information for the company. Hence, we see that in various methods, the management should
always look for the most accurate source of information and based on that the capital budgeting
should be done, so that they can take correct decisions and hence companies should focus on that
and thus this will help in making the accountants aware (Vieira, O’Dwyer, & Schneider, 2017).
Conclusion
Based on the overall analysis it can be said that capital budgeting is an important method
for budgeting and companies should adopt the same to take decisions whether they need to invest
in that project or not. Both the articles have highlighted the different methods that they can apply
and thus the accountants can have good information which they can put to great use.
13 | Page

14
References
Abdullah, W., & Said, R. (2017). Religious, Educational Background and Corporate Crime Tolerance by
Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, 129-149.
Blocher, E., & Stickney, E. (1979). Duration and Risk Assessments in Capital Budgeting. The Accounting
Review, 54(1), 180.
Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic responsibility. Educational
Philosophy and Theory, 50(3), 244-253.
Charles H, C., Giovanna, M., Dennis M, P., & Robin W, R. (2015). CSR disclosure: the more things
change…? Accounting, Auditing & Accountability Journal, 28(1), 14-35.
Coate, C., & Mitschow, M. (2017). Luca Pacioli and the Role of Accounting and Business: Early Lessons in
Social Responsibility.
Egelund-Mu¨ller, B., Elsman, M., Henglein, F., & Ross, O. (2017). Automated Execution of Financial
Contracts on Blockchains. Bus Inf Syst Eng, 59(6), 457-467.
Gullet, N., Kilgore, R., & Geddie, M. (2018). USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF
EARNINGS. Academy of Accounting and Financial Studies Journal, 22(2).
Johan, S. (2018). The Relationship Between Economic Value Added, Market Value Added And Return On
Cost Of Capital In Measuring Corporate Performance. Jurnal Manajemen Bisnis dan
Kewirausahaan, 3(1).
Lee, J., & Nobi, A. (2018). State and Network Structures of Stock Markets Around the Global Financial
Crisis. Computational Economics, 51(2), 195-210.
mejia, L., Tosi, H., & Hinkin, T. (2017). Managerial Control, Performance, and Executive Compensation.
Academy of Management Journa, 30(1).
Moore, W., & Chen, S. (1983). The Value of Perfect Information in Capital Budgeting Decisions with
Unknown Cash Flow Parameters. The Engineering Economist, 29(1), 41.
Pamela, K., & Tamara, Z. (2013). Attaining legitimacy by employee information in annual reports.
Accounting, Auditing & Accountability Journal, 26(7), 1072-1106.
Vieira, R., O’Dwyer, B., & Schneider, R. (2017). Aligning Strategy and Performance Management Systems.
SAGE Journals, 30(1).
14 | Page

15
15 | Page