Benefits and Limitations of Budgeting in Management Accounting

This assignment discusses the various benefits and limitations of budgeting in management accounting. It covers the advantages of budgeting such as tracking cash inflows and outflows, dividing money into categories of savings and expenses, and generating extra money. It also discusses the disadvantages of budgeting such as being time-consuming and costly. The assignment includes a discussion on two journals based on budgeting and their outcomes. The subject is Management Accounting, Course Code is N/A, Course Name is N/A, and College/University is N/A.

Managerial Accounting
Assignment

By student name
Professor
University
Date: 5th Sep, 2018.
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Executive Summary
The aim of this assignment is to discuss the various benefits and limitations on the costing topic,
budgeting. Therefore, we have presented in this assignment various usefulness as well as
criticism of budgeting. Also, we have taken the reference of two journals based on budgeting and
discussed the outcomes from the analysis of the journals.
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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
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Introduction
In the modern time, budget and budgeting are both very frequently used. To define in simple
term, a budget is nothing but a planning of how to spend money and how to save it at the same
time. This helps people to keep a track of the money they have spent and where they have spent
their money. The process of preparing a budget is known as budgeting. Now, it is not necessary
that the budgets are always prepared in terms of money or for the track and measurement of
money spending habits; there are various other kinds of budgets which measures other variable
of business, although at the end money is the primary focus. Budgets are being used everywhere,
from household to corporate world, it is used in every department of every organization in every
sector of every industry. Hence, we can say that budget is pervasive. Every organization in some
or the other way places high reliance over the budgets being prepared. With the help of the
budgets, the management can make corrective decisions regarding various matters. Budgets are
being used both by the centralized as well as decentralized organizations. The main purposes for
being used in the decentralized organizations are to coordinate the activities of various divisions,
convey and spread among the various divisions of the organization the strategic plans of the
business and for performance evaluation of the managers of different departments. Budgets can
also help the management in motivating the employees and staff of the organization provided the
budget is being prepared by blinking the budget to the evaluation of performance and
compensation system. There are various types of budget which is being used by many
organization and industries. Some of them are cash budget, marketing budget, performance
budget, flexible budget, functional budget, sales budget, production budget, activity based
budget, zero based budget, etc. basically we can say that every department prepares its own
budget for planning the usage of fund and resources. There are numerous budgets prepared for
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meeting numerous kinds of needs of various departments. For instance, the production
department prepares production budget to review the cost of production, machine hours and
labor hours required, usage quantity of raw materials and most importantly the spare production
capacity to plan on ways to utilize it fully. In this department budgets helps the managers to
control the cost of production and in optimum utilization of the resources and production
capacity; the sales department prepares the sales budget to review the cost of sales and the sales
quantity, this enables the managers in setting a proper selling price and way to maximize the
sales quantity, likewise the performance budget is to review the performance of various
departments by the management. It is very much evident that budgeting is inevitable in an
organization for the smooth flow of business. The management of every organization would
want to take control over the spending decision of the business, budgeting enables them to do so.
Even though budgeting is not totally flawless and does have certain drawbacks and limitations
but this does not lessen the usage requirement of the budgeting in the business environment.
Since the advantages and ease it provides is far greater than the loopholes it possesses. We have
discussed in our assignment the various advantages that budgeting provides to the management
in the business of the organization. Although the discussion on the advantages is very significant,
we have also mentioned the points of demerits that is being faced by budgeting in the corporate
world. After all, there is rarely any business practice which does not face any criticism,
budgeting is also not an exception in that.
Advantages of Budgeting
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We have discussed above the various areas where budgeting is being practiced, which renders
budgeting inevitable. The advantages of budgeting are numerous. We have discussed few of the
advantages of budgeting in our assignment. These advantages are mentioned below:
i. With the help of the preparation of cash budget, the management of an organisation can
track the cash inflows and outflows. The management will have a clear knowledge of the
amount of money which is coming in and the amount of money which is being expended
and what are sources of cash inflow and for what purposes the money is being spent.
ii. With the help of budgeting the management of an organization will be able to divide the
money into the categories of savings and expenses and can thus analyse which of the
category consumes what portion of the total income of the business and can plan on
savings and other adjustments which is required to be made, accordingly.
iii. Budgeting enables the management to plan how the money earned in the business should
be expended to maximize the savings.
iv. As we know that budgeting helps the management in maximizing the amount of savings.
This savings act as a reserve as well as provision in case there arises any unforeseen
expenditure or cost. The management would be able to meet these unexpected costs with
the savings, it was able to make because of budgeting.
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v. One of the primary objectives of the preparation of budgets is to communicate the
organizational objectives and goals with the managers of various departments as well as
those people who are important for the business of the entity. This helps in spreading
awareness amongst the various divisions about the target goals and how close they are
from achieving those targets. This also paves way for team work and coordinating the
strategic plans of the company (Naci & Hasan, 2012).
vi. Budgeting not only helps the management with saving the money but also enables them
to generate extra money. With the help of a proper budget the management can identify
those costs and expenditure which are unnecessary for the business. Once identified these
costs, the management will then take steps to either reduce it or eliminate it completely.
This will result in production of extra money.
vii. With the proper information of all the savings and expenditures as reflected in the budget,
the management will be able to decide on how much fund they should raise through debt
by analysing their debt repayment capacity with the review of budget (Heminway, 2017).
Disadvantages of Budgeting
Although budgeting enjoys innumerable benefits and advantages, it faces criticism on some
grounds which cannot be ignored completely. We have discussed various disadvantages of
budgeting as well. These drawbacks are mentioned below:
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i. Budgeting is most of the time-based assumptions, which are not completely accurate.
Therefore, a budget prepared based on inaccurate assumption cannot be expected to yield
accurate results. This affects the overall results of the organization radically since the
managers are dependent on the budget on the amount of funds they can spend (Visinescu,
et al., 2017).
ii. As we have discussed above, every department of an organization prepares budgets to
meet their requirements and for various other reasons. Moreover, there are numerous
budgets which are required to be prepared within an organization depending on the
number and type of divisions it have. Preparation of these budgets takes a lot of time.
This makes it a time-consuming process. Moreover, much of the management’s time is
spent on its review.
iii. Budgets are not only time consuming but also costly. Since the preparations of each type
of budget require a staff in the department of which the budget is being prepared, it adds
up to the costing of the company. Where the main aim of the organization is cost
reduction, the budgeting practices might end up increasing the cost.
iv. Budgeting enables the management to review the performance of each department in the
organization. With this review the management can allocate the departments which does
not meet the target or exceeds the budget (Linden & Freeman, 2017). Since the
responsibility of each manager is divided, the management can track the department for
the failure of meeting the budgets. However, the managers of different departments might
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start blaming each other for such failure. This creates friction within the organization and
hinders the smooth running of the business operations.
v. The method used for allocation of the expenses amongst the departments while preparing
the budget might not be justified and result in inequitable expense allocation. This might
cause dissatisfaction amongst the departments and will as a result affect its performance.
Also, there will be lack of coordination among the departments (Knechel & Salterio,
2016).
Discussion on the two journals
For preparation of this assignment, we are required to take two journals based on budgeting for
analysis. The two journals considered in this assignment are, firstly “Why cash based Budgeting
still prevails in an era of Accrual based reporting in the Public Sector” by Christoph Richard of
University of Potsdam and Jan van Hilden of University of Groningen while the second journal
is “Benefits of Marketing Budgeting Model” by Cornelis A. de Kuyper and Edgar A. Pessemier
of University of Virginia.
Explanation of The Selected Management Accounting Topic
The first journal is about the significance of cash budgeting in today’s time where accrual system
of reporting is followed and the second journal deals with the benefits enjoyed by the marketing
budgeting. Both these journals are being discussed below in a comprehensive manner.
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Purpose of the studies and the research questions set out to be explored
In the first journal, the area of discussion is the cash budget. The main objective of this journal is
to discuss the reasons which are more substantial due to which the government is still keen on
using cash budget even in the world where accrual system is being followed for reporting. The
authors have focused on a more advanced perspective of combining the cash budgeting with
accrual system of reporting (Gooley, 2016). The authors of this journal have review the literature
of the public-sector undertakings with their search being based on the accrual system of reporting
and cash budgeting. The authors have provided the four combinations of financial reporting
possible by combining the cash budgeting and accrual system of reporting with each other, these
combinations are:
 Cash for Budgeting and reporting (CB & CR)
 Cash for budgeting and accruals for reporting (CB & AR)
 Accruals for budgeting and cash for reporting (AB & CR)
 Accruals for budgeting and reporting (AB & AR)
From among the above four combinations, the occurrence of the third combination which is
accrual for budgeting and cash for reporting (AB & CR) is impossible, so we are left with three
combinations, which the authors have discussed with the help of tabular representations. Further
the authors have also analyzed the various reasons for the differences between the cash
budgeting and accrual budgeting in the public-sector organization (Goldmann, 2016). Budgeting,
conventionally, has been used for organizing the finance and making decisions relating to the use
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of money like how much money should be spent on various activities to limit the expenditures,
but with growing complexities involved in the business the management expect budgeting to
perform various other roles and responsibilities. The authors have also discussed the various
characteristics of public budgets to determine the situations due to which the cash budget and
accrual budget produces either similar or totally different results in case of public sector
organizations (Fay & Negangard, 2017). The article has also shown the different treatment of
revenues and expenditures in case of accrual budgeting and cash budgeting, while the former
recognizes the revenue and expenses when they are earned and incurred, the latter recognizes the
same based on cash inflow and outflow. Various pros and cons of using both types of budgeting,
i.e., cash budget and accrual budget have been stated and the assessment on such points have
also been done by the authors. The authors have concluded by establishing that the shifting of the
budgeting practices should be based on the predominant assessments of value addition of the
budget and not merely on the view of the accounting experts.
In case of the second journal, its authors have emphasized on the benefits of the marketing
budgets. In this article the authors have discussed various issues like the role of a marketing
budget, what type of expenses should be considered in the preparation of a marketing budget,
etc. The primary objectives behind the preparation of a marketing budget are planning and
control. The authors have mentioned the approach which is widely practiced while preparing
marketing budget, which is goals-down plans-up approach (Dan, 1995). The management while
using this approach reviews the various strategic requirement and opportunities at the time of
year end for the company and based on that set the goals and objectives for the next period. The
objective of the marketing budget is to facilitate the management in implementing the strategy of
marketing with the help of controlling and planning. For preparing a market budget the
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implementation of a strategic statement is necessary (Eddy, et al., 2004). The basic requirement
of a proper strategic statement is, firstly, objectives relating to marketing, secondly, a proper
description of the various marketing segments which are served and the position that the
company desires within each of the segments, thirdly, a wide domain of the marketing
programmed which describes the primary decisions on the different elements of the marketing
mix and lastly a pro-forma statement for five years. The strategic statement is generally updated
on an annual basis. This statement is very useful in providing various details relating to the
formulation of various marketing plans, the issues related to these plans, the impacts that the
expenditures will have on the profit of the organization and on the market share (Bromwich &
Scapens, 2016). The authors have also addressed a new approach towards marketing budgeting
which is model based marketing budgeting. This approach is very useful in decision making
process but is not very popular because of difficulties involved in the construction and operation
of this model. Moreover, this model sometimes gets too easy to construct while too complex
some of the times that it makes it difficult for the managers to understand the model. The authors
have also presented two case studies for the marketing budget, firstly marketing budget for an
industrial product while the second one on marketing budget on consumer goods. While the
former is related to the research on the products of the manufacturing industries, the latter is
based on the research on the consumer goods (Choy, 2018).
Similarities and differences between the findings of the 2 studies
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We have observed the following similarities between both the above journals:
1. The objective of both the journals is to convey the importance of budgeting in today’s
corporate environment.
2. Both the journals have discussed about the significance of a budgeting (Belton, 2017).
We have also witnessed certain differences in the above journals:
1. The authors of the first journal have put their emphasis on the significance of cash
budgeting in the accrual reporting business environment while the authors of the second
journal highlight the importance of the marketing budget.
2. In the first journal the authors have selected the public-sector companies for their study
while the authors of the second journal have selected the marketing industry for their
study.
Specific outcomes and relevant learnings from the research findings
There are various points which should be noted from the study of the first journal. These points
are stated below:
i. The accrual system of budgeting requires more professionalization from the part of the
financial management staff as compared to the cash budgeting, since it is a more
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advanced system of accounting and requires the staff involved to be expertise in such
area.
ii. There are evidences which proves that the operability of the accrual system of budgeting
depends on the sufficient discretion of the budget managers and not otherwise.
iii. The involvement of politicians in the affair of a public-sector organization is acute and
unavoidable, due to which proper attention is not given on the accrual as well cash
budgets.
iv. The cash budget requires various adaptions at the end of the year while the accrual
budget is based on the figures of the income and expense statements which are
straightforward and easily available.
From the second journal we have observed several points which are worth discussing. These
points have been discussed below:
i. It has been observed that the market here is least sensitive to the reduction in the
advertisements the reduction in market share is more if advertising in relation to end
users decreases while the effect is marginal in case of reduction in trade advertisements
(Alexander, 2016).
ii. For a model based marketing budget to be successful, the management is required to
implement a budget which is simple to understand and modify as well as which can
provide reasonable and meaningful reasoning for the outcomes.
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education,
71(4), pp. 411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London:
Macat International ltd.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on.
Management Accounting Research, Volume 31, pp. 1-9.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous
Worldview Analysis. Ecological Economics, p. 145.
Dan, S., 1995. The benefits of activity-based cost management to the manufacturing industry.
Journal of Management Accounting Research, Volume 7, p. 167.
Eddy, C., F. & Warlop, L., 2004. The Value of Activity-Based Costing in Competitive Pricing
Decisions. Journal of Management Accounting Research, Volume 16, pp. 133-148.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of
fraud. Journal of Accounting Education, Volume 38, pp. 37-49.
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Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish
Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional
Law, and Organic Documents. SSRN, pp. 1-35.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York:
Routledge.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making.
Business Ethics Quarterly, 27(3), pp. 353-379.
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.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of
Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education,
71(4), pp. 411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London:
Macat International ltd.
Page 16

Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on.
Management Accounting Research, Volume 31, pp. 1-9.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous
Worldview Analysis. Ecological Economics, p. 145.
Dan, S., 1995. The benefits of activity-based cost management to the manufacturing industry.
Journal of Management Accounting Research, Volume 7, p. 167.
Eddy, C., F. & Warlop, L., 2004. The Value of Activity-Based Costing in Competitive Pricing
Decisions. Journal of Management Accounting Research, Volume 16, pp. 133-148.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of
fraud. Journal of Accounting Education, Volume 38, pp. 37-49.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish
Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional
Law, and Organic Documents. SSRN, pp. 1-35.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York:
Routledge.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making.
Business Ethics Quarterly, 27(3), pp. 353-379.
Page 17

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.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of
Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
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